PSU banks on a roll; SBI becomes most valued PSU

SBI beats ONGC to become most-valued PSU firm in m-cap

Shares of public sector banks (PSBs) were in focus on Tuesday, with the Nifty PSU Bank index hitting a 52-week high on the National Stock Exchange (NSE) in intra-day trade. Profit booking at higher levels saw the index pare gains and close flat. By comparison, the Nifty50 index ended 0.4 per cent lower at 9,105.

Bank of India, Vijaya Bank, Indian Overseas Bank, UCO Bank and Corporation Bank were some of the top gainers, with a gain of up to 2.9 per cent. Meanwhile, State Bank of India (SBI) which gained 2.4 per cent to Rs 297 levels on Tuesday in intra-day deals, became the most-valued PSU by market capitalisation (m-cap). SBI so far this year has outperformed the market with over 16 per cent rise, against 10.5 per cent gain in the benchmark index. Oil and Natural Gas Corporation, however, was down 5.4 per cent during the period.

The rally, analysts say, has largely been fuelled by the recent the Reserve Bank of India’s (RBI’s) action plan on prompt corrective action (PCA) and an improvement in operational and financial performance over the next few quarters. 

According to the PCA plan, any bank with a net non-performing assets (NPA) ratio of six per cent or more, as of March, will come under the scanner of the RBI, which can then direct the bank on how to go about its business.

“Given the recent RBI move on PCA and bad assets, this could well be the last quarter when the banks report high level of NPAs. The results and the commentary, going forward, will be better than what banks had been reporting in the past,” says A K Prabhakar, head of research at IDBI Capital.

However, analysts also point out that the overall profitability of the banking sector in the March quarter will optically look better on a year-on-year (y-o-y) basis because of a very low base, which can be attributed to implementation of AQR (asset quality review) in 4QFY16.

“Against the backdrop of slower economic recovery, higher debt leverage and muted credit growth, fresh loan slippage is seen at an elevated level, although lower than that of the previous quarter. The RBI’s forbearance on classification of assets will provide cushion against any spike in NPAs in retail and SME categories,” analysts at Nirmal Bang Institutional Equities said in a results preview note.

So, what should you do with banking stocks then? 

Given the developments, though analysts remain positive on the road ahead, they suggest investors should remain choosy and invest only where there is earnings visibility coupled with low NPAs. 

“Most investors while acknowledging the better long-term fundamentals were somewhat concerned with the lack of earnings growth and premium valuation of the sector, in line with our assessment. While the liquidity inflow to DIIs could remain high in the near term, we don’t see the current environment as a good opportunity for adding to the stocks. SBI is our key buy recommendation within banks,” says Nilanjan Karfa of Jefferies in a co-authored March 27 report with Avinash Singh.

Prabhakar of IDBI Capital, on the other hand, remains positive on SBI and Canara Bank, and sees a limited downside for these stocks from the current levels.