The first tranche of Rs 10,000 crore, reports suggest, will be provided to banks that are financially weak. State Bank of India (SBI), Bank of Baroda (BoB), Bank of India (BoI), Punjab National Bank (PNB), Canara Bank and IDBI Bank will be provided capital in the second tranche, while the third tranche will be provided to banks based on their performance during the past three quarters of FY16.
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Investment strategy
Given the development, should you invest in stocks these banks? While the move to recapitalise is in the right direction, analysts say there is still no visibility of earnings improvement.
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“There is still no visibility that the banks will be able to return to a situation where they can give, say, 15 per cent return on equity. That apart, they'll still not be fully capitalised. Investors should look to buy a profitable entity. Just because an entity is not making money but is trading at a cheap valuation, does not generate a strong fundamental reason to buy the stock. Recapitalisation is an incremental step, but a lot more needs to happen before they become convincing fundamental buys,” Agrawal adds.
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A recent report by UBS suggested state-owned banks to have a relatively higher share of immovable property-backed loans as compared to private banks such as ICICI Bank, HDFC Bank and IndusInd Bank. According to the report, the percentage of such loans for SBI stood at 35 per cent, for PNB at 36 per cent and BoB at 43 per cent.
Government capital allocation begets growth strategy reset at the banks, point out Nilanjan Karfa and Anurag Mantry of Jefferies, who will need to closely track which loan segments they need to cater, based on their core competence, capital usage (risk weights) and risk profile of customers, among others, to improve on the profitability ratios (return on assets and equity) while at the same time conserve as much capital as possible.
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