PSBs: Sustaining Q2 momentum for a year key to regaining lost faith

Q2 results suggest a trend of easing asset quality issues and the weight of merger behind them

There was pessimism this time last year, when the government decided to merge 10 public sector banks (PSBs) to four. Last year’s September quarter (Q2) results, when losses bulged for these banks, heightened the pessimism.

Cut to the present, the mergers seem to have been blessings for these banks. Indian Bank, Canara Bank and Punjab National Bank (PNB) have all declared Q2 results for FY21. And these show that after six quarters of weak net interest income (NII) growth, the banks posted healthy growth of 32 per cent, 29 per cent, and 96 per cent, respectively, in Q2. While the provisioning costs didn’t ease, these banks for the first time confidently said cost optimisation gains due to merger should reflect from Q3. Despite flat overall growth, their retail books grew 4-9 per cent year-on-year in Q2. Bank of Baroda, which until FY20 was consolidating its merged entities, also fared well in Q2, doubling net profit to Rs 1,679 crore, its best show in two years.

Another interesting aspect is the improvement in asset quality after 18 quarters of a rigorous clean up thanks to the asset quality review (AQR) mandated by the regulator in December 2015. Non-performing assets (NPA) ratios of most PSBs improved with State Bank of India (SBI) leading the pack with a low net NPA ratio of 1.6 per cent.

Nilesh Shah, managing director and chief executive officer, Envision Capital, says AQR has been a step in the right direction, especially for PSBs. “Resolving legacy issues was taken up as top-priority and this focus percolated right below the banks, which has helped them clean up their books significantly,” he explains.

The other important outcome is the shift in focus from corporate and infrastructure loans. As with private banks, the share of retail loans has risen to 50 per cent for these PSBs and over 65 per cent for SBI. “Positive aspect is that retail is a relatively new book for PSBs and they have built it after an attempt to scale up underwriting practices,” said an analyst with a foreign brokerage.

However, these positives might not drive up valuation in the near term. Most PSBs, barring SBI (0.8x FY21 estimated book), trade at 0.5x FY21 estimated book or lower. “How loan recast shapes up the book will be important to support valuations rerating,” said a research head of a domestic brokerage. Analysts say the pain of AQR is still fresh in investors’ memory. Hence, sustaining Q2’s momentum for at least a year would be key to regain faith.