Recent rally in PSU bank stocks may be short-lived

Capitalisation need, pressure on assets, competition to limit gains

Public sector undertaking (PSU) bank stocks have outperformed their private peers in the recent past. As against a 1.6 per cent fall in the CNX Bank Nifty Index from July 1, the CNX PSU Bank Index has gained 6.5 per cent. The former includes stocks from public and private sectors, but the weightage of private banks is higher. While stabilisation in asset quality, though marginal, of PSU banks in the June 2015 quarter is one reason for the rally, the recent announcement of PSU bank reforms is another. However, this rally or outperformance might fizzle out soon due to lack of sustained improvement in fundamentals of PSU banks, believe analysts.

Over the years, a majority of PSU banks have struggled to protect their market share and have fallen short of their private peers on multiple fronts. Upcoming new banks and differentiated banks (payments banks, small banks) will further increase pressure. Nitin Kumar, BFSI analyst, Prabhudas Lilladher, says, "PSU banks together enjoy 65 per cent market share in system loans currently. We believe this will reduce to below 60 per cent levels over the next three years." While the recent reform measures are in the right direction, they are not enough especially on the capital requirements front. Analysts say the $11 billion capital infusion planned over the next four years is way below the $23-60 billion that PSU banks need to comply with Basel III norms.

Many PSU banks also lag their private peers on digital platforms such as apps, social media, among others -- ceding away first mover advantage to the latter. As a result, they lag their private peers on growth, profitability as well as return ratios. While asset quality of key banks, including State Bank of India, Bank of Baroda and Punjab National Bank, did show some stability in the June quarter, it is still not out of the woods. Risk of rising slippages from their huge restructured loans portfolio continues to weigh on their prospects.

Foreign brokerage Credit Suisse wrote in its recent note, "As PSU banks' asset quality and pre-provision profitability stress is likely to persist for a couple of years, we continue to prefer private banks." Given the emergence of stress in sectors like metals, the market will be keeping an eye on this front. PSU banks are leveraged to an improvement in macroeconomic growth but that might not happen in a hurry. Appointment of managing directors and CEOs, with some from the private sector, will start moving things in the right direction, as they will adopt a more focused approach on improving financial health of these banks. However, these measures will bear fruit in the longer run, hence any rise in stock prices is merely sentiment driven for now.

Most analysts, thus, remain cautious on PSU banks. Given its relatively superior financials and it being the only PSU bank to keep its market share intact, SBI is the preferred pick followed by Bank of Baroda.