The last month has seen an interesting divergence between the share prices of private sector banks and public sector banks (PSBs). Private sector banks have seen price corrections or stagnation during this period. PSBs have seen serious speculative inflows. The Bank Nifty index (which has seven private sector banks and five PSBs) has moved down 1.8 per cent. But the PSB index (which tracks 12 PSBs, including the five in the Bank Nifty) has moved up 11.5 per cent.
This reverses a trend that has been in force for years. The private sector banks have usually done much better than PSBs. If we take the single best performer in either group, IndusInd Bank has returned 74 per cent in the last year, whereas the Bank of Baroda has returned 18.7 per cent in the last year.
In the Bank Nifty, the private sector banks have much higher weightage, contributing over 84 per cent of weight to the Bank Nifty. This is due to the methodology of free float composition. The PSBs all have large government holdings and minimal free floats. The high private sector weights is reflected in the long-term performance of the Bank Nifty. The Bank Nifty is up 21 per cent in the past year, while the PSB index is up seven per cent. The PSB index had negative returns until just over a month ago.
But in terms of actual credit disbursal and loans outstanding, the PSBs contribute far more to the banking system. Over 70 per cent of credit disbursal and loans outstanding comes from the PSBs. Unfortunately, the PSBs also hold the vast majority of non-performing assets within the Indian banking system as well as the vast majority of restructured loans.
The bull run has come about on the basis of several factors. First, the government has announced renewed commitment to shoring up PSB balance sheets, without selling off stakes. The recapitalisation is forced anyhow if the PSBs are going to meet Basel III norms. The current commitment of Rs 70,000 crore is nowhere near enough. But it is a beginning, assuming the commitment is kept. The fact that stakes sales will not occur in large quantities is being seen as a positive. More liquidity could have meant shares being priced down.
Second, several PSBs have introduced enhanced provisioning in Q1 (April-June 2015). This has meant reduced net profits but it might also mean improved balance sheets. Third, there is a general feeling that the economy has bottomed out and now may be set to turnaround and grow quicker. If that's so NPA generation should reduce.
Purely in terms of technicals, there is little question that uptrends are now visible across all the PSBs. Every stock in the PSB index has generated a positive return in the past month. These stocks are mostly available in the derivatives segment so traders can also take leveraged positions if they so desire. The technical recommendation would be to set stop losses and take long positions.
However, there is cause to wonder if the market is jumping the gun? As of now, we have no guarantees that NPAs will reduce, or that the economy is picking up. Corporate results don't offer such indications. The biggest NPAs for the PSBs are in completely intractable areas such as loans to stalled infrastructure projects, to loss-making PSUs, to state power boards, and to commodity players who are struggling to cope with historic lows. There are no signs that political interference, with PSBs will cease and that is the underlying cause of most of their worries. This means there could, once again, be a sharp turnaround in sentiment.
The author is a technical and equity analyst
