Banking sector mergers and NPA mess: Should you invest in PSU banks now?

Banking sector, it seems, is poised for consolidation in the days ahead. After the government merged State Bank of India and its associates, reports suggest that it may now merge smaller banks like Dena Bank, Vijaya Bank, UCO Bank, Union Bank of India and United Bank of India with Canara Bank and Bank of Baroda. READ THE REPORT HERE 
 
The markets, however, gave a lukewarm reaction to the development. Canara Bank and Bank of Baroda lost nearly 1% each on the National Stock Exchange (NSE) in intra-day deals at Rs 353 and Rs 171 levels, respectively. On the other hand, the above–mentioned smaller banks were trading between 1-3% lower at around 12:30pm. By comparison, The Nifty Bank index and the Nifty50 indices had slipped 0.5% and 0.3%, respectively.

 
Given the consolidation move and the existing non-performing asset (NPA) overhang in the sector, analysts strongly advise against investing in any of the PSU banks at current levels – at least till more details of the merger are announced.
 

“On the expectation that there will be a resolution to the NPAs and with government giving more power to the RBI, PSU banks have already doubled over the past few months. At the current levels, there is no point in investing in these stocks now. Given the business environment, they are hardly witnessing any credit growth and there are no signs that it will pick up anytime soon,” said Saurabh Jain, assistant vice-president (research) at SMC Global.

 
Adding: “Also, the NPA resolution won’t happen in a hurry. The government has just chosen these banks to assess if there is a possibility to acquire the smaller-sized banks. The balance sheets of the chosen banks are already bleeding. So, for people who are already invested in these banks, profit booking will be the best move in the current scenario.”
 
Given that there are few details available as of now, analysts suggest private banks to be a better bet at the current levels.
 
“If weaker banks merge with Bank of Baroda, its balance sheet would deteriorate even more. Hence, I do not recommend buying any PSU Banks as of now,” says Siddharth Purohit, senior equity research analyst at Angel Broking.

 
Jain, on the other hand, is skeptical regarding Canara Bank as well. Given the NPA issue, even though lesser in quantum than say Punjab National Bank, he says, investors will be better off avoiding this stock as there will be no immediate respite from the NPA issue.