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Public sector (PSU) banks have been hit hard by slowing economy and higher interest rates. This is reflected in their asset quality which has taken a huge knockdown in the past 2-3 years. The loan restructuring pipelines and commentary on asset quality continues to be bearish for most banks. As a result, stock valuations of most PSU banks have been hammered. The CNX PSU Bank index is down 45% from its intra-day high of 3,860 in January 2013 (down 55% since April 2011).
However, there are a couple of PSU banks who have managed to buck the trend of slowdown and are enjoying relatively better asset quality than their peers. Their managements remain confident on both future growth and credit quality. Out of the prominent PSU banks, Bank of Baroda (BoB) and Jammu and Kashmir Bank (J&K Bank) stand out on these parameters. As a result analysts also rate them higher among PSUs, and upsides are reasonable given target prices.
BoB has managed to keep its asset quality tight in the current slowdown. Its NPA (non-performing assets) ratios are amongst the better placed PSU banks. The bank's delinquency ratio has come off from 2.7% in the March 2013 quarter to 1.8% in the December 2013 quarter. Analysts expect its slippage ratio (indicates the proportion of assets, standard or restructured, turning into NPAs) to fall from 2.4% in FY13 to 2.2% this fiscal and further to 1.9% in FY15. Its Gross NPA ratio is expected to stabilise at 3.3-3.5% in FY14 as well as FY15, believe analysts. The management, too, expects asset quality to stabilise from here on.
Among key reasons for the relatively better asset quality is the bank's loan book, which is spread across sectors. The bank's focus on improving recoveries and lower rate of slippages versus peers is another positive.
"For FY14, we expect BoB's loan traction to be in line with industry. On the NPA front, BoB’s performance could be relatively better than peers. BoB’s performance in the past two quarters has been healthy in terms of asset quality, business traction and MTM (mark-to-market) management. Also, Tier I CAR (capital adequacy ratio) at nine% plus is better than peers", says Kajal Gandhi of ICICI Securities, who has a ‘Buy’ on BoB with a target price of Rs 610.
J&K Bank, too, enjoys strong asset quality. The bank's gross NPA ratio has reduced 40 basis points from two% in FY10 to 1.6% in FY13. December 2013 quarter was the ninth quarter in a row where the bank's gross NPA was below 2% level. This is commendable considering that most PSU banks have witnessed deterioration in asset quality over the past 2-3 years, as well as in recent quarters. Going forward, the restructuring pipeline remains minimal and the bank management is confident of maintaining its asset quality. Most analysts are also factoring in similar gross NPA ratios for FY14 and FY15 (with minor increase of about 10 basis points in FY15).
Robust economic activity in the J&K augurs well as the bank lends primarily to corporates/contractors engaged in development work of the state. In the retail segment, large part of loans are for housing and state government employees form a large chunk of the bank's borrowers. The loan book outside J&K state is corporate heavy but the bank has ensured to lend only to corporates with high credit rating. They have maintained provision coverage ratio at a healthy 90% level.
"Higher loan growth outlook with CD (credit/deposit) ratio improvement and shift in loan mix towards higher yielding advances could provide momentum to NII growth for the bank relative to other mid-sized banks. The bank also has a higher CASA (current and savings account) ratio, strong capital adequacy and robust provision coverage, much higher than most other mid-sized banks", says Vaibhav Agarwal, VP- Research – Banking, Angel Broking. While it has a strong position in the J&K, it is planning to ramp up presence outside the state, which will fuel the bank's growth going forward.
