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Don't rush to buy public sector bank stocks post recap plan, say analysts

Post this capital infusion, the common equity tier 1 (CET1) ratio for all PSU banks would reach over 8.5 per cent, with net stressed assets reducing to 102% of net worth from 117%, reports suggest

Puneet Wadhwa  |  New Delhi 

Bank recapitalisation plan, Banks, Indian Banks
Bank recapitalisation plan, Banks, Indian Banks

Despite the capital infusion of Rs 881 billion announced by the government across public sector banks (PSB), investors should not rush to buy these PSBs but evaluate on a case-to-case basis and invest selectively, analysts say.

As a part of the Rs 2.1-trillion bank recap plan spread over FY18 and FY19 announced on October 25, 2017, the government on Wednesday announced Rs 881.39 billion capital infusion in 20 public sector banks (PSBs) during the current fiscal, with IDBI Bank cornering a lion's share of Rs 106.1 billion.

Post this round of capital infusion, the common equity tier 1 (CET1) ratio for all would reach over 8.5 per cent, with net stressed assets reducing to 102 per cent of net worth from 117 per cent earlier, reports indicate. is expected to be the major beneficiary, as its CET1 ratio would improve from 6.6 per cent to 12.5 per cent. The other beneficiaries include IDBI Bank, United Bank, Central Bank of India and Bank of Maharashtra with their CET1 ratio improving 270 - 430 basis points (bps).

Also Read: PSBs trade mixed after Government unveils bank recap plan

The recap program also comes with riders that includes measures to improve efficiency and encourage responsible lending, which analysts believe will reduce underwriting mistakes. There is no proposal yet to merge banks, which is another positive for stronger banks like BoB and SBI, they say.

A key worry for the markets, however, is the pricing of the bonds and their tenure.

"The bonds are not likely to have statutory liquidity ratio (SLR) status. We expect the coupons to be floating rate as well, else in a rising-rate environment, banks will end up taking mark-to-market losses," write Nilanjan Karfa and Harshit Toshniwal of Jefferies in a report.

INVESTMENT STRATEGY

Though most experts remain bullish on the banking space from a long-term perspective, they suggest investors be selective and buy only those banks whose non-performing assets are at a manageable level of 3 - 4 per cent and there is credit growth / earnings visibility. If such banks get money, it will reflect on their fundamentals going ahead and can be bought into, they say.

"Investors should evaluate whether the money allocated will change the fortune for these banks. There are banks (like Indian Overseas Bank) where the net outstanding is more than the net worth.

In such cases, monetary support will aid to a limited extent but will not help the bank in the path of strong business growth. One should be selective," explains G. Chokkalingam, founder & managing director, Equinomics Research. Also Read: Govt to soon bring corporate governance norms at state-owned banks

Since the recap announcement in October 2017, bank stocks have had a mixed run at the bourses with only Axis Bank, ICICI Bank and YES Bank outperforming the benchmarks - the S&P BSE Sensex (up 9.5 per cent) and the S&P BSE Bankex (up 9.4 per cent). Bank of Maharashtra, Central Bank of India, Andhra Bank, of India and Corporation Bank have been the worst performing, down 15 - 30 per cent during this period.

"Within our coverage universe, we like BOB, SBI, Punjab National Bank (PNB). BOI remains least preferred of our covered PSU banks," says Adarsh Parasrampuria of Nomura in a co-authored report with Amit Nanavati and Riddhi Jain. Also Read: NPA crisis: 1,463 bad loan accounts owe PSU banks Rs 1 bn or more

Morgan Stanley recommends owning ICICI Bank, Axis Bank and ICICI Bank, it says, offers the best risk-reward acros large-cap banks in Asia. While and BoB are the top picks for Motilal Oswal Research within the PSU banking space, Chokkalingam likes ICICI Bank, Axis Bank, South Indian Bank and Karnataka Bank.

Capital requirement

First Published: Thu, January 25 2018. 23:04 IST
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