Govt to infuse Rs 20,000 crore in PSBs via recap bonds; should you buy?

Analysts suggest that given weak balance sheets and low recap amount, outlook for the public sector banks continue to remain bleak

Shares of public sector banks including State Bank of India (SBI) and Canara Bank were largely trading higher on Tuesday on hopes that the government could infuse up to Rs 20,000 crore through recapitalisation of bonds by the fourth quarter of the current fiscal.

Individually, Indian Overseas Bank, Central Bank of India, Bank of Maharashtra gained 1.5 per cent each on the National Stock Exchange (NSE), followed by gains in Union Bank of India (1.4 per cent), and SBI and Canara Bank (1 per cent each).

On the downside, Indian Bank, Bank of Baroda, Bank of India, Punjab National Bank, and UCO Bank slipped between 0.5 and 1.75 per cent. In comparison, the benchmark Nifty50 index was up 0.33 per cent at 10:06 am. Nifty PSU Bank index, which hit a high of 0.8 per cent in the early deals, pared gains later to trade 0.28 per cent lower on the NSE.

A senior government official, however, told Business Standard that the Centre would not front-load capital into state-owned banks. "The capital requirements for banks have been changing. We wanted to ensure we secured Parliament nod in case we needed to infuse capital into banks after assessing their needs later this year," the senior government official said.

"The recapitalisation money would go towards meeting the Covid-19-related provisioning requirements of banks and a fair assessment would be possible after the impact of loan moratorium was visible on the books of banks in the third quarter," added the official. READ MORE HERE

Investment Strategy

So far in the calendar year 2020, the stock performance of PSBs has been abysmal. With an exception of Bank of Maharashtra, who has outrun the benchmark Nifty50 index by dipping just 1 per cent YTD as against 6 per cent decline in the index till Monday, none of the bank has performed well at the bourses, ACE Equity Data show.

Fundamentally, too, financial institutions are facing the worst time due to pandemic as there is a high possibility of worsening of asset quality. Lower economic activity has impaired the companies’ cash flow generation ability, deteriorating their financial metrics. Under the base case scenario, the RBI expects gross non-performing assets (GNPA) ratio of the country's scheduled commercial banks (SCBs) to increase to 12.5 per cent by the same period next year from 8.5 per cent in March, 2020.

Given the weak stock performance and equally worrying fundamentals, should one now turn optimistic about the banks’ fortunes and buy PSBs at current level?

Analysts advise caution. “Despite the government’s decision to infuse capital, the road ahead for PSBs doesn’t look easy. Most of them have high moratoriums and will require higher provisioning going forward… Given this, I wouldn’t suggest investors buy PSBs at current level,” says Siddharth Purohit, equity analyst at SMC Securities.

Jaikishan Parmar, senior equity research analyst at Angel Broking adds that the possibility of higher slippages from moratorium and sector in stress before Covid-19 could lead to higher provision going ahead. "This higher provision cost is likely to dent net-worth for few banks or could impact capital adequacy. While private banks have already raised capital or in the process of raising capital, PSBs are nowhere near".

"They must raise capital either through recapitalisation or in other forms due as their capital adequacy ratio is low relative to private peers, and is near the regulatory requirement. Currently, their GNPA is higher compared to private banks and the possibility of slippages would require elevated provision and same time for growth they required capital... That said, while PSBs are trading at lower valuation compared to the historical average, we believe recapitalisation of PSB banks won't change much investment sentiment. Investors should wait till they get clarity on slippages from the morat book," he says.

Apart from weak balance sheets, analysts say the amount allocated for this year is disappointing.

“The government has set aside Rs 20,000 crore which is at least a five-year lower. Amid a global pandemic, when things have gone haywire, this amount is not sufficient,” says AK Prabhakar, head of research at IDBI Capital.

The government had infused Rs 70,000 crore in FY20, Rs 1.06 trillion in FY19, Rs 80,000 crore in FY18 and Rs 25,000 crore each in FY17 and FY16, budget documents show.

“With moratoriums mounting and the Supreme Court yet to deliver its verdict in the interest waiver issue, PSBs are at a precarious position… If the SC decides to waive interest, it will be a big negative for banks… Investors should avoid this sector for now,” he says.