PSU bank shares bleed in first half

Outlook remains bleak, with waning rate cut hopes; experts continue to ride private banks

Shares of public sector banks (PSBs) are bleeding and the pain in the free-falling counters appears far from getting over.

Market participants remain wary, continuing to prefer their private counterparts even in the current state of the markets. At a time when India’s benchmark stock indices have lost less than five per cent of their value so far this calendar year, state-owned banks have lost 20-45 per cent.

The country’s largest lender, State Bank of India (SBI), witnessed an erosion of close to 20 per cent. Punjab National Bank (PNB) and Bank of Baroda (BoB) saw declines of 26 per cent and 37 per cent, respectively. Mid-cap and small-cap lenders such as Allahabad Bank, Indian Overseas Bank, IDBI Bank and Union Bank of India have lost as much as 43 per cent in these six-odd months.

Navneet Munot, chief investment officer (CIO) at SBI Mutual Fund, says, “State-owned banks will continue to test patience. Asset quality remains a concern and in such a bad macro-economic scenario, PSBs always feel the heat.”

According to market experts, the sudden currency depreciation and rise in 10-year bond yields have postponed the likelihood of any rate cuts. “Despite a good monsoon, the sharp rupee fall might nullify the benefit of rains. We were expecting the green shoots of falling inflation and a good monsoon would come in September-October but things have gone for a toss,” says Ambareesh Baliga, managing partner, global wealth management, at Edelweiss Financial Services. He says one should not buy bank stocks in such a market, as one could expect lower levels for both PSB and private bank counters.

Asset quality has always been the biggest contributor in valuation differentiation among PSBs and private banks, believes Kaushik Dani, head of equities at Peerless MF. “With a fear of slowdown and declining growth, asset concerns will only worsen for state-owned banks,” he says.

Dani continues to prefer private banks. He says in terms of profitability, restructuring and asset quality, private lenders would continue to score over their state counterparts.

This year so far, against an average erosion of 30 per cent in the share value of PSBs, those of private entities such as HDFC, Axis and ICICI  have lost only about eight per cent. Kotak Mahindra Bank and IndusInd Bank have gained about eight per cent.

According to Vaibhav Agrawal of Angel Broking, “Some of the PSBs are available at dirt-cheap valuation. With positive guidance from RBI on restructuring and inflation coming down, I believe one should take a basket approach on buying into these counters. Asset quality is not getting worse and there is some sort of stabilisation in NPAs (non-performing assets).”

The S&P BSE Bankex today closed at 12,775.43, about 11 per cent lower from where it started the year. The presence of private banks in the index arrested the sharp fall. Else, the probable impact could be ascertained from the 20 per cent sharp fall in the S&P BSE PSU index so far this year.