Public banks with high dividend offer opportunities

With a 2-3 years horizon, investors may reap benefits of tax free returns

For investors who are eschewing equity investments as they content themselves with eight-nine per cent pre-tax return from their fixed deposits and recurring deposits, it's worth looking at the thrashed public sector banks, which are generally high-dividend counters. If stayed with for long, the yield could be as high as 13 per cent in some cases and returns will be tax-free.

If the last few years' dividends are taken into consideration, a sharp decline of as high as 50 per cent so far this year in stocks of public sector banks makes it an attractive proposition to enter these counters, say market experts. But they do not rule out a further 5-10 per cent downside in the government banks, given the unclear situation on non-performing assets (NPAs).

If one enters the severely beaten down stocks--be it Allahabad Bank, Dena Bank, Andhra Bank, Oriental Bank of Commerce (OBC) or for that matter even Union Bank of India, Bank of India and Indian Bank, among others-- at current levels, the investor can earn a tax-free dividend with a yield of anywhere between five and seven per cent, provided one stays invested at least for 12 months hereon.

Rikesh Parikh, vice-president (equities) at Motilal Oswal Financial Services, says: "If investors have a two-three years horizon, such counters can generate a high dividend yield of close to 13 per cent and returns will be tax-free. Though the scenario remains uncertain on account of NPAs, investors may start accumulating slowly at lower prices. It's very much possible that not only good dividend but investors can even see reasonable capital appreciation if stayed for long."

According to Vaibhav Agrawal, an expert on banking sector at Angel Broking: "Some of the public sector banks are available at dirt cheap valuation. With positive guidance from RBI (Reserve Bank of India) on restructuring and inflation coming down, I believe one should take a basket approach of buying into these counters. Asset quality is not getting worse and there is some sort of stabilisation in NPAs."

In recent times, banking counters are behaving like high-beta stocks. Movement during the past few weeks in bank Nifty is an indication that the index tends to move fast upon news - positive or negative.

Market experts say lot of bad news have already been discounted in public sector banks. "I believe currently risk-reward ratio is favourable. Investors should start looking at these counters as there were times during rallies when investors were left out and could not get in as the rise was quite quick and steep," says Silky Jain, research analyst at Nirmal Bang. "Even a slight positive news, such as rate cuts, can push the counters up," adds Jain.

Even large public banks like Bank of Baroda, Punjab National Bank and the country's largest lender State Bank of India are struggling on the stock exchanges. If accumulated at current levels, the counters can generate higher than expected returns, say market experts.

"One needs to have strong hands to hold them. Further downside risks are limited, may be 5-10 per cent if not more," says an independent market expert, who is taking a contrarian call at a time when most market participants are maintaining a negative stance on the sector.