Nifty PSU Bank index nears four-year low; six banks tumble to 5-year low

Shares of public sector banks (PSBs) continued to reel under pressure on Tuesday with the Nifty PSU Bank index nearing its four-year low level. The index hit intra-day low of 2,078.80, its lowest level since March 1, 2016, when it touched 2,053.60 levels in intra-day trade. It dipped below its previous low of 2113.05 levels hit on October 9, 2019. In past three trading days, Nifty PSU Bank index has slipped 7.9 per cent as against 2 per cent fall in the benchmark index.

Among stocks, Bank of Baroda (BoB), Punjab National Bank (PNB), Union Bank of India, Oriental Bank of Commerce (OBC), Syndicate Bank and Allahabad Bank hit their respective five-year low on the NSE. Besides, Andhra Bank, Indian Bank and Canara Bank hit 52-week low.

The fall comes amid weakening economic trends that can lead to subdued credit growth and continued elevated fresh stress formation in the immediate term. That apart, the developments in the telecom sector have added to concerns. Recently, the Supreme Court (SC) came down heavily on the Department of Telecommunications (DoT) for not recovering adjusted gross revenue (AGR) liability from the telecom companies and has asked the operators to pay the dues before the next hearing on March 17, 2020.

According to Motilal Oswal Securities, the SC verdict on AGR liabilities will further impact banks’ asset quality and could drive an uptick in credit cost over FY21, especially at a time when Vodafone Idea (Voda-Idea) faces an imminent shutdown. “In comparison to peers, State Bank of India (SBI) has better ability to provide for this stressed telecom company owing to its higher recovery potential from other stressed accounts/divestment in cards business,” said Gautam Duggad, head of institutional research at Motilal Oswal.

Those at Emkay Global also share a similar view. The recent SC rebuke on recovery of AGR dues for telecom players, they believe, has already raised the risk of default (without government support) from Voda-Idea for select banks like SBI, IndusInd Bank, YES Bank, ICICI Bank, Axis Bank, PNB among others.

Meanwhile, resolution of corporate insolvency cases under the Insolvency and Bankruptcy Code (IBC) remains a work-in-progress and is yet to demonstrate signs of speedier resolution or high recoveries, as indicated by the Q3FY20 publication by IBBI (Insolvency and Bankruptcy Board of India), analysts at SBICAP Securities said in BFSI sector update.

“Corporate resolution pipeline via NCLT/non-NCLT, too, is on the rise including key cases like Rattan India Nashik, Jindal Thermal, RKM Power, Essar Transmission, India Power Haldia, Jal Power, Jhabua Power, Ind Barath Utkal, KSK Mahanadi, GMR Kamalanga, etc. Banks hope that many of these exposures will be resolved over next two quarters including Bhushan Power, leading to continued lower NPAs going forward,” wrote analysts at Emkay Global in a recent note.

In this backdrop, analysts recommend investors stick with relatively higher retail orientation, healthy capital ratios and likely beneficiary of accelerating corporate resolutions.

“The market reaction to the developments is overdone. There is too much pessimism around. Banks, especially state-owned, have made adequate provisions and the debt / NPA resolution will take time. Investors need to understand this. For those who can stay put for the next two years, this is a good time to buy and hold PSU banks,” advises G Chokkalingam, founder and managing director at Equinomics Research.