My Application Form Status

Check the status of your application form with Angel Broking.
Arq - The Hyper Intelligent Investment Engine By Angel Broking

What is driving the revival of buying interest in PSU banks?

Companies and Sectors | Published on May 03rd 2017 | Comment(s) 0
  • Subscribe to our mailing list

Since the beginning of the year 2017, the Nifty has been a strong performer. While the performance of sectors like private banks and downstream oil has been much talked about, not many have noticed the fabulous performance of the PSU banks. The chart below captures the PSU banking index performance in the 4 months since Jan 2017. The 4-month returns have been an impressive 25.22% and most of them are still quoting at very reasonable valuations…


PSU banking has, probably, been that one untold story of market performance in 2017. The performance is not just concentrated to large PSU banks like SBI, BOB or PNB. In fact, PSU banks across the board have outperformed the Nifty by a margin. So what exactly is changing for PSU banks? There are actually 5 things that are changing and they look set to continue…

1.    Growth is the best answer to NPAs, and that is coming back…

The big worry since demonetization has been that economic growth may vanish. In reality, the impact of demonetization on GDP growth has been less than 50 basis points. On the contrary, the remonetization thrust combined with banks being flush with liquidity is going to drive growth substantially in the coming months. Banks have been left with a surplus liquidity of Rs.4 trillion which was infused into the banking system compulsorily due to demonetization. With GDP growth likely to stay above 7.5% and the dividends of cheap oil continuing, corporate growth may finally be back. Once the asset book expands, the NPAs may partially get resolved and may also appear smaller compared to the size of assets. That is exactly what happened in the mid-90s when banking assets saw a huge expansion.

2.    Government is going all out to help stressed sectors…

Steel is a classic example. The government not only imposed import quotas but also fixed minimum import prices to prevent dumping by Chinese companies. That solved the one singular problem hat steel companies had; that of unfair competition from China. Over the last 1 year, not only have steel companies turned profitable but they are also in expansion mode. InvITs for the infrastructure sector, REITS & low cost housing for the realty sector and UDAN for the power sector are cases in point. These are the sectors that are the most stressed and which contributed the most to banking NPAs. As things change for the fortunes of the stressed sectors, PSU banks will breathe a lot more easily.

3.    Bad banks and ARCs may come to the rescue of PSU banks…

The bad bank did not get any mention in the last Union Budget but efforts are underway. The idea of a bad bank is that it takes over the bad assets from the bank’s balance sheet and helps the bank become asset-light and start lending with a clean balance sheet. Of course, there is still the confusion over who will own the bad bank but that is more technical and can be addressed as a policy issue. ARCs are already picking up steam in a big way, wherein banks are allowed to sell their bad assets to asset reconstruction companies at a discount. These are two major steps that could change the future course of PSU banks.

4.    Greater accountability and restructuring of PSU banks…

Not just the CEA and Niti Aayog Chairman, but even the finance minister has hinted at large scale restructuring of PSU banks in India. This includes, giving them more decision making powers and also making them more accountable. There is also the proposal to put their packages and perks on par with private banks to drive performance. Then there is the plan to infuse PSU banks with new talent and also look at professional CEOs to run the business. Above all, the markets are also rife on privatization of banks that had been nationalized in the past. Greater restructuring of ownership, management and operations is likely to go a long way in re-rating these PSU banks.

5.    PSU banks may have finally seen a bottoming out of bad assets…

Markets are also quite optimistic that the bottoming out of bad assets may have happened. From these levels, the bad assets are likely to either stabilize or reduce. That means incremental risk to the balance sheet of banks is quite limited. That could be a big takeaway for PSU banks. The Asset Quality Review (AQR) initiated by the RBI has forced banks to write-off assets in a big way. As the asset quality cycle bottoms out and recoveries gather steam, then a lot of recoveries may positively impact the bottom-line of banks. That could be a big takeaway for PSU banks.

So, there seems to be a method behind this frenzy. It is not just about investors chasing PSU banks because they are cheap. They are actually standing at a cusp where growth could come back and the worst in terms of NPAs may be behind them. Not surprisingly, at current prices there seems to be a lot of buying interest!




Add new comment