PSU banks need more capital; don't rush to buy them now, say analysts

After the RBI's day-long board meet on Monday, the central bank decided to consider relaxing lending norms for banks under the PCA

The resolution to look at capital requirements for banks and changes to the prompt and corrective (PCA) framework are not enough reasons for investors to rush and buy public sector banks right now, say analysts.

After the Reserve Bank of India’s (RBI’s) day-long board meet on Monday, the central bank decided to consider relaxing lending norms for banks under the PCA and set up a committee to discuss the transfer of surplus reserves to the government.

Analysts at Nomura feel enabling more public sector banks to come out of the PCA framework will require more upfront capital injection from the government, which they expect over the next few months.

“This along with initiatives on the loan restructuring of MSMEs (if implemented) may partly help contain the fallout from the shadow bank liquidity crisis, though a near-term growth slowdown is still inevitable, in our view,” said Sonal Varma, managing director and chief India economist at Nomura in a recent co-authored report with Aurodeep Nandi.

The development, which came in post market hours on Monday, saw most PSU banks decline in trade on Tuesday. Bank of Maharashtra, Corporation Bank, Dena Bank and UCO Bank slipped over 2 per cent. In the past three trading days, the PSU bank index had gained 4.7 per cent, as against 0.94 per cent rise in the benchmark index.

While the outcome of the board meeting suggests that a direct confrontation has been avoided and the more contentious issues have been deferred to committees, analysts say the decisions suggest efforts have been made to preserve the RBI’s operational autonomy.

“In what was construed as the most anticipated board meeting, the outcomes were fairly logical although by no means conclusive. Additional capital infusion would be required should the Government want the banks to push balance sheet growth,” wrote Nilanjan Karfa and Harshit Toshniwal of Jefferies in a report.

INVESTING STRATEGY

Though most experts remain bullish on the banking space from a long-term perspective, they suggest investors be selective and buy only those banks, especially in the public sector, whose non-performing assets are at a manageable level and there is credit growth / earnings visibility.

G Chokkalingam, founder and managing director at Equinomics Research, for instance, suggests price-to-adjusted book value per share (P/BVPS) of less than three; healthy growth in credit and earnings; and networth more than net outstanding NPAs as the three important criteria investors look at before investing in PSU banks.

“The RBI seems to be more flexible now. The fall in PSU bank stocks on Tuesday is more on account of high expectation that the central bank would relax PCA norms immediately. That said, investors should not rush to buy these stocks right now. State Bank of India (SBI), Indian Bank and Vijaya Bank are the three stocks that meet the above criteria,” Chokkalingam said.

On a fundamental basis, the PSU banks are still bleeding. The listed 21 public sector banks reported a 281 per cent rise in net loss at Rs 149 billion for the July – September 2018 (Q2FY19) quarter on a standalone basis (except SBI), ACE Equity data shows. Amount allocated towards provisions and contingencies during the recently concluded quarter rose 7.5 per cent to Rs 579 billion during this period on a year-on-year (y-o-y) basis.

“PSU banks continue to display weakness in profitability and capitalisation and we maintain our reduce rating, except for SBI,” says Abhishek Murarka, an analyst tracking the sector at IIFL Institutional Equities.