Nifty PSU Bank index hits 9-month low

Shares of public sector banks (PSBs) are trading lower for the second straight day, with the Nifty PSU Bank index hitting nine-month low on the National Stock Exchange (NSE). The index hit an intra-day low of 3,002, its lowest level since January 11, 2017, and has slipped 18.5% from its recent closing high of 3,723 on July 31, 2017.

By comparison, the benchmark Nifty 50 was down marginally by 0.58%, while Nifty Bank (down 4%) and Nifty Private Bank index (down 2%) were down less than 5% during the period.

Among individual stocks, State Bank of India (SBI), Oriental Bank of Commerce, Vijaya Bank, Corporation Bank, Union Bank of India and Punjab National Bank (PNB) have lost 19% to 22% in past two-and-a-half months. Bank of Baroda, Punjab & Sind Bank, United Bank of India and IDBI Bank are trading close their respective one-year lows on the NSE.

"The non-performing asset issue with PSU banks is already known. What's surprising is de-growth / subdued growth in the business itself. For some, the NPA problem is not peaking out at all. If the credit growth is not picking up, it is difficult for high debt laden PSU banks to come out of the mess they are in. That apart, select stocks had a good run recently and now investors are taking cognizance of these factors and selling," explains G. Chokkalingam, founder & managing director, Equinomics Research.

As regards their September quarter performance, most analysts expect PSU banks to report single-digit growth in net interest income as compared to their private sector peers. Nirmal Bang, for instance, expects private sector banks to report relatively better NII of 15.5% on the back of higher growth in retail banks as compared to a single-digit growth for PSU banks.

Provisioning, according to Nomura, will remain high as banks provide for National Company Law Tribunal cases. It expects SBI to report weak asset quality trends with higher slippages and weak recovery trends versus its guidance in Q1FY18.

Going ahead, further progress in steps by the RBI and the Government of India to resolve stress loans (such as targeting large accounts for resolution under IBC 2016) as well as regulatory relaxation on policy bottlenecks would be the key to the stock performance of corporate lenders, say analysts at Nirmal Bang in a result preview note.

In this backdrop, Chokkalingam says investors should be cautious while investing in these scrips at the current levels.

"Investors should look at price-to-book value (P/BV), which should be less than 2-3x; the net NPA percentage should not be above 4 - 5%; and there has to be some visibility of credit growth. Look at these parameters before taking an investment call," he advises.