PSU bank stocks recover, but NPAs a concern

RBI's liquidity tightening measures also weigh heavily on these stocks

PSU bank stocks recovered marginally today after being slammed heavily over the last three months. The CNX PSU Bank index recovered by 4.69%. However, analysts are still worried about these stocks as rising non-performing assets and the liquidity tightening measures still weigh heavily on the stocks.

PSU Bank stocks have been among the worst performing indices in the last three months as scores of stocks hit their 52-wk lows. CNX PSU Bank index dipped 33% in the last three months. By contrast, CNX Nifty fell just by 9.9%.

Among the stocks that are languishing near their 52-wk lows are Andhra Bank, Canara Bank and Syndicate Bank among others. A severe selling pressure gripped these PSU Bank stocks in the last month as worries that the liquidity tightening would impact profits has gained ground.

PSU Banks have also seen a rise in their non-performing assets. Gross NPAs increased 16% in the first quarter as compared to March quarter. But over the last year, NPAs have nearly doubled.

Says Disha Hazari, research associate, GEPL, “One of the major concerns for PSU banks has been the deteriorating asset quality. NPAs have increased significantly.”

PSU banks are facing immense pressure due to RBI's liquidity tightening measures. RBI has reduced LAF (liquidity adjustment facility) to 0.5%, and increased rates on marginally standing facility (MSF) to 10.25% and also imposed restrictions on daily borrowing under its repo window. All this is pushing tremendous pressure on banks as some of them are raising their base prime lending rates.

PSU bank stocks are still not out of the woods even despite their valuations dipping to around 4 times earnings.

Says Hazari, “In the short term, PSU banks will still face pressure and so investors could avoid them.”