Street continues to be wary of PSBs

Most public sector banks (PSBs) are still trading at a deep discount to their book value, even after rallying sharply after the government announced a Rs 2.11-lakh crore recapitalisation plan in October.

According to data, of the 20 PSBs, only State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB) and Indian Bank are currently trading slightly above their book value. On the other hand, a dozen of PSBs are even valued less than half their book value. Lingering concerns over asset quality and lack of clarity on a capital infusion plan are seen as the reasons. 
 

Further, indication by the government that the stronger players will get a bulk of the share of new capital has done little to reverse the fortune of smaller banks.

So far this year, the Nifty PSU Bank index has gained 26 per cent. The index had rallied 30 per cent on a single day after news of the recapitalisation. In comparison, the Bank Nifty index, a gauge for the performance of the country’s top banks, has gained 40 per cent this year.

The effectiveness of the recapitalisation plan is likely to play a crucial role in restoring the health of PSBs. 

“Better capitalised PSBs could also challenge private banks, especially those with a high cost of funds, and regain some of their lost loan market share. The PSB stocks could re-rate if recapitalisation is followed by asset quality stablising and execution improving,” said Manishi Raychaudhuri, Asia Equity strategist, BNP Paribas. 

In the recent past, the government has undertaken several steps, including liberalisation of bankruptcy laws and faster non-performing asset (NPA) resolution to help PSBs. However, these measures will only bear fruit in the long run.

The Street, in the meantime, continues to remain sceptical of most PSBs, despite cheap valuations.