Thursday, May 19, 2016

Why I am Bullish on some of the PSBs...
Three of my recently recommended Public Sector Banking (PSB) counters: 
(i) Allahabad Bank Ltd (Rs.53.20; intra-day high: Rs.53.60; Up: 3.20%; Book Value: Rs.192.83; 52-week L/H: Rs.39.40/Rs.108.25), 
(ii) Punjab National Bank Ltd (Rs.76.20; intra-day high: Rs.77.20; Up: 3.25%; Book Value: Rs.192.06; 52-week L/H:  Rs.69.25/Rs.180.55) and 
(iii) State Bank of India Ltd (Rs.180.20; Intra-day high: Rs.180.55; Book Value: Rs.165.49; 52-week L/H: Rs.148.25/Rs.305.00), were up yesterday on Bargain Hunting. 
Speaking with a Business Channel, Ms.Usha Ananthasubramanian, MD & CEO of Punjab National Bank said, the bank has done a major cleansing exercise in the last quarter and is now targeting recovery of loans worth about Rs.50,000-20,000 crore in FY17. 

"There is about Rs.700 crore coming out of the discoms. So, it is a process by which we have done a major cleansing because we have moved on for the last few months into a daily recognition of NPAs which has thrown some surprise. But we are on top of it. So, at this point in time, as I said, because we have done a major cleansing. Whatever happens in future and if the recovery is robust, I think we would have done a good job" she said. 

Meanwhile, Hemindra Hazari, www.hemindrahazari.com, said: "This is not the end but the beginning of the end for bad asset quality for banks". 

Now, it is a fact that, given the asset quality baggage and the subsequent earnings pressures, the return ratios for the above mentioned PSBs are anticipated to be not so encouraging. Besides, levered corporate exposures and meaningful restructured pipe-line, indicates pain is here to stay for the PSBs for sometime. However, the stocks are already trading near their lowest bands of historical multiples and hence, further downside is, limited. 

Moreover, since the GOI holds a major stake in these PSBs, it is expected that Narendra Modi government, will try its best to revive the sector, especially when it has taken some positive steps to inprove the health of DISCOMS. 

It is to be remembered that Banks have been forced by the Reserve Bank of India to provide higher amounts for the bad loans, thus ensuring that the red ink spreads across their balance sheets. 

"The (PNB) bank intentionally took much higher provisions for cleaning up of the balance sheet. Naturally they had to take provisions for the high NPAs as they had not accounted for the asset quality review in Q3 of the previous fiscal," Siddharth Purohit, senior equity research analyst -- banking, Angel Broking told IANS. "Going ahead certainly this kind of loss will not be there for Punjab National Bank Ltd; though asset quality has still not stabilised, the last part is done," he added.

Reserve Bank of India had given a deadline for all banks to complete their asset quality review by March 31, 2016. In this connection, the government said last week that banks' gross non-performing assets (GNPAs) could rise to 6.9% by March 2017, the deadline given by Reserve Bank of India (RBI) Governor Raghuram Rajan for banks' balance sheet clean-up. 

In another significant development, The State Bank of India (SBI) board on Tuesday decided to submit a proposal to the central government seeking an “in-principle approval” to initiate negotiations with its five associate banks. there are long-term benefits that SBI can derive from the merger. For instance, the total market share of the entire group put together is 22-23 per cent while that of SBI is 17-18 per cent. The merger adds 400-500 basis points to the market share of SBI, estimates Suresh Ganapathy, financials analyst at Macquarie Capital. The merger could also throw up opportunities to cross-sell products. SBI is far more aggressive to grow its retail products as well as fee income and this will rub off favourably on the prospects of its subsidiaries. All these will happen in a gradual manner.

Also, the SBI management believes that after the merger, its balance sheet will increase to Rs.37 lakh crore from Rs.28 lakh crore currently and SBI will get fixed assets worth Rs.4,000 crore from the books of its subsidiaries. The management expects its cost of funds to come down by 100 basis points within a year, as subsidiaries currently have high deposit rates.

Photo: The Hindu
Considering the above facts I, continue to remain BULLISH on some of the PSBs, as all efforts are being made to recover the bad loans, an expectation of, credit offtake to pick up steam in the following quarters, as Indian Economy, has perhaps come out of the "Deflation Trap"; after a long gestation period and the Steel Sector is on a recover mode (CLSA in its February, 2016 report wrote: Steel sector lead the slippages for the PNB) and the meteorology department had indicated, a good monsoon season, ahead (In case of PNB, 68% advances are in the rural and semi urban -- so it gives them a lot of scope to lend to agriculture sector and also, the other small tickets like the retail). 

The Punters are betting on some well known PSBs, on the premise that a  revival in global growth and better monsoon rains in India will help cut bad loans and revive credit growth. 

The Indian Finance Minister recently said, that he is getting a sense that the stressed sectors that have caused these huge holes in bank balance sheets, they are now beginning to recover, sectors like steel, sectors like roads. So, he expects balance sheets to start recovering. 

Therefore, those investors who have still not entered these "Blue Chip PSBs", can consider, buying them in every dip for 25-30% appreciation from their CMPs, in the next 30 days. I am expecting their price to double in the next 6-9 months; as worst seems to be over for some of these PSBs.

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