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Punjab National Bank (PNB), Oriental Bank of Commerce, Bank of Baroda (BoB), Bank of India (BoI) and Canara Bank saw foreign investors cut stake by up to three percentage points in the June quarter. In State Bank of India (SBI), Andhra Bank, UCO Bank, IDBI Bank, Syndicate Bank, Indian Overseas Bank and State Bank of Mysore, their stake declined by a little less than one percentage point, according to the shareholding pattern filed by these banks.
A total of 28 public and private sector banks have thus far disclosed their June quarter shareholding. This shows FIIs’ stake declined in 21 banks, while it increased marginally in six – DCB Bank, Punjab & Sind Bank, Karnataka Bank, South Indian Bank, Indian Bank and Corporation Bank. In Central Bank of India, it was unchanged.
As a result, the PSB index on the National Stock Exchange has underperformed the market. Thus far in 2015, the CNX PSU Bank index has fallen 22 per cent, as compared to a three per cent rise in the CNX Nifty and no change in the Bank Nifty.
Credit growth, at multi-year lows, will continue to exert pressure on revenue growth of banks, especially the PSBs that are facing capital and asset quality challenges, analysts say.
They expect net profit growth to be weak across government banks year-on-year (yoy), with weak revenue growth, higher provisioning and lower gains from treasury operations. Operational earnings growth is also likely to be weak for most government banks in the June quarter.
Explains Vaibhav Agrawal, vice-president at Angel Broking: “PSBs have a lot more pain left in terms of asset quality issues. The recovery (in asset quality) that was expected sooner by the market is not there right now. That apart, the interest rate cut the markets were expecting could be delayed, given the cautious stance adopted by the Reserve Bank of India. As a result, treasury gains have also been delayed. All these triggers could now play out at a later stage, rather than in the immediate term. All this has seen investors move away from PSBs. We recommend staying with private sector names for now.”
In April, Moody’s had also warned that the Indian banking system's asset quality, loan loss coverage and capital ratios were relatively weak. This, said the rating agency, posed sovereign credit risks because of the sector's role in financing of growth and the government's deficits through its purchase of state securities.
Adds Aalok Shah, an analyst tracking the sector with Centrum Broking: “For PSBs, asset quality challenges continue and with the attractiveness of restructuring waning, the stress might manifest partly in NPAs (non-performing assets). This, in addition to slippages from restructured assets, might keep overall accretion to bad loans and, thus, credit costs high.”
Excluding SBI and its associates, the other PSBs had a combined 38 per cent yoy decline in aggregate standalone net profit at Rs 4,407 crore for the quarter ended March. The 21 PSBs had a combined profit of Rs 7,090 crore in the March 2014 quarter, CapitalinePlus data shows.
“On asset quality, while private banks are unlikely to spring negative slippage surprises, incremental stress will be high for PSBs and any meaningful dip in loan impairment will lag economic growth,” analysts at Edelweiss Securities said in a June quarter results' preview note.
Nilanjan Karfa, an equity analyst with Jefferies, suggests investors need to closely watch BoB, PNB, BoI and Canara Bank. “These banks have a large number of branches and are undergoing a change in board composition. There could be new growth strategies from these banks which could disrupt and redefine business practices across the sector,” he says.
Shah of Centrum maintains a hold rating on PNB and a buy rating on SBI, with a target price Rs 160 and Rs 360, respectively.
