Past sins push PSBs to edge

Gross NPAs surge on RBI directive to recognise these upfront, valuations dip to all time-lows

Government-owned banks are in the firing line of bears. The Nifty public sector bank index is down 55 per cent from its January 2015 high of 4,419, pushing the sector valuation to historic lows. The index is down to 1,984 points from 2,573 at the beginning of 2014.

The results of PSBs were hit hard in the December 2015 quarter after the Reserve Bank of India (RBI) told them to reclassify loans and provide for stressed assets in the third and fourth quarters of 2015-16. Their stocks have fallen harder than the broader market and even their private sector peers, thanks to investor concerns about their rising non-performing loans. The benchmark NSE Nifty 50 is down a little less than a quarter from its all-time closing high on March 3 and is still 11 per cent higher than its level at the beginning of the 2014 calendar year.

Investors’ dismal view of PSBs reflects in the valuation ratios. For the first time in recent memory, all PSB stocks are trading at a discount to their book value, including behemoth State Bank of India, which is now trading at 0.8 times its book value, lower than even at the peak of the 2008 Lehman global crisis. The bank was valued at 1.38 times its book value in March 2009 and 1.2 times in March 2014.

The ratios are worse for second-tier and third-tier ones. Punjab National Bank (PNB) is now trading at a little over a third of its book value, compared to a price to book value ratio of 1.2 times in March 2009 and 0.72 times in March 2015, while  Bank of India stock is available is less than a quarter of its boom value against 1.3 times in March 2009. Union Bank of India’s valuation has dipped to 0.39 times the latest book value, compared to 1.32 times in March 2009 and 1.11 times in March 2015.

This fall in stock prices and valuation has gone hand in hand with the spike in their bad loans. For example, SBI’s non-performing assets (NPAs) as a percentage of total advances had doubled in seven years, to 5.1 per cent at the end of December 2015 from 2.86 per cent at the end of March 2009.

In all, 16 PSBs which have declared their quarterly results so far were sitting on gross NPAs worth Rs 2.73 lakh crore. This figure is up from Rs 1.96 lakh crore at the end of March 2015 and Rs 35,000 crore at the end of March 2009.

PNB’s NPAs had ballooned to 8.5 per cent of the total, from 1.6 per cent in March 2009. Indian Overseas Bank NPAs jumped to 12.4 per cent of advances from 2.5 per cent during the period. Dena Bank reported an NPA ratio of 9.85 per cent, from 2.13 per cent in March 2009. The average PSB now has an NPA of around 6.5 per cent of assets, against two per cent in the March 2009 quarter.

As most PSBs earn a profit of less than one per cent on their assets, investors are contemplating a scenario where bad loans could wipe off nearly a decade of cumulative profits. For example, SBI’s current NPAs are valued at Rs 72,792 crore and this is nearly equivalent to its cumulative net profits between FY09 and FY15. PNB’s gross NPAs are equivalent to its cumulative net profits of the past 12 years.

Not surprisingly, investors in these stocks are spooked and are flying to the safety of other assets. Many analysts fear worse in the coming quarters. “The problem is likely to get worse before it starts improving. Many of these stocks might appear cheap on valuation ratios such as price to book value, simply because most banks are yet to fully recognise their losses on account of bad loans,” says Dhananjay Sinha, head, institutional equity, Emkay Global Financial Services.

He expects more downside and advises investors to stay away from PSB stocks. If losses on bad loans are fully recognised, the net worth (or book value) for many of these banks will shrink dramatically, making them expensive on a price to book value, he adds.

The government has pumped Rs 36,500 crore into 39 PSBs since April 2014. That investment is now worth Rs 19,500 crore, as the share prices of PSBs have fallen below the issue price.

For example, it put equity capital worth Rs 1,000 crore in United Bank of India at Rs 42.75 a share but the scrip is now down to Rs 17, a 70 per cent erosion in the value of that investment. The erosion is 58 per cent and 51.3 per cent, respectively, in Punjab & Sind Bank and Indian Overseas Bank.