PSU banks under pressure; Nifty PSU Bank index down over 3%

Shares of public sector undertaking (PSU) banks were under pressure, falling by up to 6% on the bourses amid selling pressure after the benchmark indices decline more than 1% each in noon trades.

Canara Bank, Bank of India (BOI), Punjab National Bank (PNB), Andhra Bank, Oriental Bank of Commerce and Bank of Baroda (BOB) were down between 4% and 6% on the National Stock Exchange (NSE).

At 01:19 pm, the Nifty PSU Bank index was down 3.75% as compared to 1.6% decline in Nifty 50 index and 2.18% fall in Nifty Bank index. The S&P BSE Bankex too down 2% against 1.5% drop in the benchmark S&P BSE Sensex.

Rating agency CRISIL on Wednesday said four ailing public sector banks (PSBs) may fail to pay interest on additional Tier-I bonds as mounting losses could wipe out their revenue reserves.

“A sharp decline in profitability and mounting losses could wipe out the revenue reserves of some public sector banks (PSBs) and hamper their near-term ability to service coupon on Additional Tier 1 (AT1) bonds issued under Basel III capital regulations,” Crisil said in a press release.

As many as 13 of the 21 PSBs (taking the State Bank of India and its associates as a consolidated entity) reported losses for fiscal 2016, and almost half of them could do so again this fiscal. As on date, 14 PSBs have Rs 22,600 crore of AT-1 bonds outstanding.

While Government of India has committed capital support to PSBs to sustain their capital ratios above regulatory minimum, the coupon on AT1 bonds can only be serviced through current year’s profit or from revenue reserves and hence any capital infusion by government alone cannot improve the bank’s ability to service coupon on these bonds, it added.

According to Motilal Oswal Securities, PSB would post another quarter of net profit decline (down 13%) for the second quarter ended September 30, 2016 (Q2FY17), but this decline is a sharp moderation from the 53% decline posted in June quarter (Q1FY17).

Edelweiss Securities cautious on mid?size PSU banks as up?fronting of stress will lead to much lower?than?anticipated return ratios.

“This, coupled with higher dilution risk, at weak multiple, will be detrimental to shareholders’ value; and operationally too their competitive prowess will be severely impacted given diversion towards clean up and capital constraints for growth,” the brokerage firm said in results update.