Stocks of public sector banks (PSBs) have turned in a dull performance in the December quarter. While, conventional wisdom says to buy these stocks on a correction, but, the fact that most banking stocks have given negative returns anywhere between 23 per cent to 65 per cent in the last one year, investing in PSB space may not be a good idea, say analysts.
Analysts do not expect an improvement in the March quarter either owing to mounting bad loans, higher provisioning and Reserve Bank of India's (RBI) diktat to clean up bank books by March 2017.
"As per the RBI advice, the existing non-performing assets (NPAs) should be fully written off by the March quarter, but the restructured asset book will continue to trouble the banks even the in the next financial year, unless the economy recovers. The banks need to get a hold on their restructured loan book before we can conclusively say that the worst is behind," said Sudip Bandyopadhyay to Business Today online.
Now that global rating agency Standard & Poor's has warned public sector banks of rating downgrades, everything boils down to Budget 2016 as to how much capital government will set aside to captalise state run banks. Experts believe any amount less than 1,00,000 to 5,00,000 crore by fiscal year 2019 will set the banks to report a tepid March quarter as well.
"In order to kick start the growth process, banking system needs to be adequately capitalised. Government had planned to infuse 70,000 crore by FY19, which in our view should be at least Rs 1,00,000 crore," told Alpesh Mehta, Analyst - Banking & Finance, Motilal Oswal Securities to Business Today online.
Bandyopadhyay also said 4,00,000-5,00,000 crore capitalization is required for the PSBs.
Asset quality stress to remain in the short-term
The gross non-performing assets (NPAs) of public and private sector banks increased considerably in the December quarter after Reserve Bank of India (RBI) instructed all banks to complete the process of recognizing and providing for their existing stressed assets under asset quality review (AQR), giving a deadline of March 2017 for the same.
Data compiled by database Capitalline and as told by Payal Pandya, Research Analyst, Centrum Wealth to Business Today online, the gross NPAs for listed private banks in December quarter increased by 26 bps quarter-on-quarter to 2.7 per cent and that for the listed public sector banks increased by 94 bps QoQ to 6.7 per cent.
"While this step taken by RBI appears painful for the asset quality and profitability of the banks in the near term, it would eventually clean up the books for all the banks (private as well as public) and result in overall healthy asset quality across sector," said Pandya.
Vikas Gupta, Executive Vice President and Chief Investment Officer at ArthVeda Capital also believes the near term outlook looks bad for PSBs. However, he added June onwards things should start getting better because by then, the full extent of the bad assets will get known.
Nifty PSU Bank index has logged negative return of 46.57 per cent in the last one year with Oriental Bank of Commerce shedding most (65.92 per cent) in the same period. Among major PSBs, State Bank of India, Punjab National Bank, IDBI Bank and Bank of Baroda tumbled 47.73 per cent, 56.86 per cent, 23.22 per cent and 24.21 per cent, respectively. Rating agency Standard & Poor's has put the stock of Indian Overseas Bank on credit watch with negative implications. The scrip lost 50 per cent in one year.
However, Pandya expects the Nifty PSU Bank index to move higher gradually in the medium to long term on the back of pick-up in the overall economy and stabilizing of asset quality issues, but added near term volatility will remain due to global factors and weak market sentiments.
"Bank NIFTY and NIFTY PSU Bank index will oscillate 10 per cent to 15 per cent from the current levels, without registering any major upside or down side till the March quarter results are out," said Jimeet Modi, CEO, Samco Securities.
The better among worst
IndiaNivesh Securities suggested State Bank of India, Bank of Baroda and Canara Bank are better among other PSB stocks but did not recommend 'buy' on these stocks. It also said Bank of India, Punjab National Bank, Oriental Bank, Andhra Bank, Allahabad Bank and Syndicate Bank are most vulnerable and should be completely avoided in PSB space.