Recapitalisation of PSU banks will improve investor sentiment: Analysts

Experts believe there is enough opportunities for growth as capital infusion will address growth requirement of PSBs

Public sector banks (PSBs) have been major beneficiaries of the recently concluded Budget. With a fresh allocation of Rs 70,000 crore towards recapitalisation of PSBs, against Rs 40,000-crore proposed in the interim Budget in February, state-owned banks got a larger share of the kitty.
 
However, stocks of PSBs are yet to reflect this optimism. The reason perhaps being this is the third major round of recapitalisation and none of the past exercises has translated into growth capital.
 
However, with 2018-19 being the peak of a clean-up drive and PSBs hiking their provision coverage ratio to 60 per cent and above, the current fiscal is incrementally viewed as a better year for the sector.
 

Analysts at Nomura say the proposed budgetary infusion covers about 2 per cent of PSBs’ common equity tier 1 (CET1) capital, excluding State Bank of India (SBI) and Indian Bank (currently the better capitalised banks).
 
CET1 ratio may go up from the current 9.1 per cent to 10.8 per cent, according to the brokerage, which also believes that the capital infusion will address growth requirement of PSBs.
 
On the question of whether there is enough growth opportunity, experts say that should not be a hurdle for PSBs. Loan growth has been on a strong wicket for five-six months in a row and, more importantly, growth appears promising even in the big-ticket opportunities such as corporate lending.
 
In addition, a recent report by Elara Capital states that non-banking financial companies (NBFCs) and housing finance companies lost a market share of 3 per cent and 2 per cent, respectively, to banks in vehicle loans and housing loan segments. They expect further loss in market share of these entities (to banks) on account of solvency issues.
 
“PSBs are making inroads into segments they earlier lost to NBFCs. If they have improved their underwriting abilities in the last few years, they may regain the market share from NBFCs,” says Ajay Bodke, chief portfolio manager, Prabhudas Lilladher.

If this pans out to the advantage of PSBs, then some of the smaller names such as Union Bank, Canara Bank, and Bank of India, too, may be get back on analysts’ radar, apart from SBI and Bank of Baroda. In other words, analysts say if financials materially improve by September quarter of 2019-20, a broad-based recovery of investor interest is likely. “Benign valuations of PSBs also make them attractive,” says an analyst covering banking stocks.