RBI's measures are good; be selective in buying PSU banks, say analysts

Given the developments, most experts remain bullish on the banking space from a long-term perspective, but suggest investors be selective and buy only those banks whose NPAs are at a manageable level

Banking stocks came under selling pressure on Wednesday after the Reserve Bank of India (RBI) unveiled new norms for dealing with non-performing assets (NPAs) on Monday. Nifty PSU Bank was the worst performing index, falling over 3% in intra-day deals with Punjab National Bank, Bank of India, Canara Bank, IDBI and Oriental Bank of Commerce slipping 4.3% to 7%.

The fall comes on the back of a revised framework on resolution of stressed assets issued by the RBI, which is likely to increase the reported non-performing asset (NPA) levels of the banks in coming quarters. From a long-term perspective, however, analysts see the new rules helping early identification of stress and resolution of issues. Not only will the move promote better credit discipline, they see it as a precursor to implementation of International Financial Reporting Standards (IFRS) going ahead.

"Corporate banks with higher quantum of stressed / restructured assets (Canara Bank, PNB, Bank of India, Union Bank, SBI and ICICI Bank) may see higher proportion of their bad loans drifting toward IBC process (failing any satisfactory resolution plan), as the upgrade / recovery chances of such tenured stressed loans remains low," say analysts at Motilal Oswal Research.

According to reports, the amount of loans that carry a high risk of slippage into the NPA category over the next few quarters is about Rs 2.8 trillion. PNB, Canara Bank, Union Bank of India and Indian Bank will have to provide over double the amount in FY19 as NPA provision, states a Phillip Capital India Research note.

As a part of the Rs 2.1-trillion bank recap plan spread over FY18 and FY19 announced on October 25, 2017, the government recently announced Rs 881.39 billion capital infusion in 20 public sector banks (PSBs) during the current fiscal, with IDBI Bank cornering a lion's share of Rs 106.1 billion.

Given the developments, most experts remain bullish on the banking space from a long-term perspective, but suggest investors be selective and buy only those banks whose non-performing assets are at a manageable level and there is credit growth / earnings visibility.

"The NPAs are inherited problems from the past and the provisions augur well in clearing up the mess. One can look at bargain hunting in these counters. There are banks that have been able to maintain asset quality which is above industry average. Those that are able to grow business and have manageable NPA levels are the ones that should be on investor's shopping list," explains G. Chokkalingam, founder & managing director, Equinomics Research.

Thus far in the current financial year 2017 - 18 (FY18), most public sector banking (PSB) stocks have under-performed the frontline benchmarks. Oriental Bank of Commerce, Union Bank of India, Allahabad Bank, IDBI Bank and Syndicate Bank have been among the worst performing - falling up to 20% during this period. By comparison, the S&P BSE Sensex has around gained 15%, while the S&P BSE Bankex has moved up nearly 19%.

Analysts at Motilal Oswal like SBI, ICICI Bank and Bank of Baroda among corporate banks, given their strong asset quality.

"Also benefiting from the above guidelines would be players who are active and looking to get aggressive in asset reconstruction business - Edelweiss and Kotak. The existing book of such players could also benefit from accelerated resolution," say Sumeet Kariwala and Subramanian Iyer of Morgan Stanley.