'Select PSU bank stocks are value buys'  

R. Yegya Narayanan
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Mr Lalit Thakkar, Managing Director, Institution, Angel Broking
HANDOUT_E_MAIL Mr Lalit Thakkar, Managing Director, Institution, Angel Broking

The huge sell-off in PSU bank stocks on Friday, in the wake of fears over growing NPAs, has raised concerns over whether there is more pain in store for investors holding PSU bank shares.

What has added to investor anxiety is the RBI's likely stance on rates tomorrow and whether it would have an impact on the bank stocks.

Already, a few of the PSU bank stocks have either slumped to fresh 52-week lows as in the case of IOB, or just missed breaching them as in the case of PNB. Many of the PSU banks, including Bank of Baroda and OBC that came out with their Q1 numbers today, have shown higher NPAs, but the stocks are holding firm on overall market buoyancy due to global factors.

Investors are also apprehensive of the impact of the deficient monsoon on the rural economy that has so far provided a silver-lining to the picture. If the rural economy takes a big hit, it would impact not only the financial sector but also automobiles and FMCG.

Responding to a question from Business Line as to whether the dumping of PSU bank stocks on Friday was justified, Mr Lalit Thakkar, Managing Director, Institution, Angel Broking, Mumbai, said the ‘trend of weak asset quality’ for PSU banks had been visible for a few quarters now, including the latest quarter. He expected the pressure to persist for a few more quarters as no ‘macro-economic catalysts’ for improvement were visible. But the private banks had adopted ‘conservative risk-management strategies’ since the post-Lehman period, that had yielded positive results. Hence, this ‘large divergence in stock performance’ of private and PSU banks, he said.

While he expected private bank stocks as a group to continue to perform better than PSU bank stocks, he said such divergence in stock performance was not new. Some of the PSU bank stocks had become really cheap. Among them, PNB and Union Bank are ‘among the larger and structurally stronger PSU banks’, but had corrected the most and felt that they offered `decent opportunities for value-buying for patient investors’.

On whether the truant monsoon would derail the rural economy, affecting the PSU banks further, Mr Thakkar said priority sector lending by PSU banks to agriculture was 'responsible for a greater share of their NPAs’. But as farmers are allowed to pay in the next season when there is a good crop, the 'stress may not show up immediately in the books of banks’. But it does add to overall stress.

On whether the PSU banks would continue to do well despite the NPA hiccups, the Angel Broking MD said credit demand from the industry was still strong as nominal GDP growth was still reasonably high at 14-15 per cent. As credit demand exceeded deposit growth, banks were in a position to sustain decent margins and return on assets. The return on equity for PSU banks was expected to decline due to NPAs, but as a group they were expected to have enough operating profitability to absorb these NPAs and report modest bottom lines. With mixed performance, `stock-picking and value-buying will be required’.

Replying to a question as to how much more the PSU bank stocks could fall before they showed some stability, he said in the near-term as a group, PSU banks were likely to under-perform further. But among them `larger, stronger banks including SBI, PNB and Union Bank could be considered for value-buying’. But his top picks were Axis Bank and ICICI Bank.

On the crucial RBI meet tomorrow, Mr Thakkar said the outlook for inflation was bleak as food inflation was likely to creep up further and the fiscal deficit may exceed budgetary estimates. In his view the RBI will have to `play the role of anchoring inflationary expectations by not cutting rates’ and didn’t expect any rate cuts in the upcoming policy. The markets were already `factoring in the same’ and it was `unlikely to come’ as a negative surprise for bank stocks, he felt.

On whether investors could make a contrarian bet on PSU bank stocks, he said this could be done but only in case of shares of large PSU banks which are fundamentally strong and have huge retail deposit base, such as SBI or PNB. `Ultimately, when the cycle turns for the better, these stocks are expected to give high beta returns from their current lows’, he added.

(This article was published on July 30, 2012)
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