Top 20 PSU banks valued similar to five leading NBFCs

Priya Kansara | | Updated on: Jan 19, 2018

Analysts believe worst is not over for PSU banks

Even as the valuation of public sector banks may have fallen to abysmal levels, analysts are not in a hurry to recommend buying as they believe the worst is not yet over. Instead, they prefer non-banking finance companies, which have performed better than the entire public sector banking space in the December 2015 quarter. Private sector banks’ superior financial performance is already known to investors.

Market capitalisation of the top 20 PSU banks (by advances) at Rs 2.5 trillion is almost equal to the six leading non-banking finance companies including HDFC, Dewan Housing Finance, LIC Housing Finance, GIC Housing Finance, Shriram Transport Finance and Repco Home Finance.

The net profit of these NBFCs grew at an average 20 per cent year-on-year in the December 2015 quarter. Axis Capital said NBFCs reported healthy growth in loans/ AUM driven by retail demand arising out of the festive season though rural demand was under stress on account of two consecutive droughts.

On the other hand, most public sector banks reported net losses in the quarter or their net profit declined substantially due to higher provisioning requirements following a sharp rise in gross non-performing assets. “Public sector banks witnessed a 29.4 per cent increase in gross NPAs. On an aggregate level public sector banks’ gross NPA ratio increased 7.2 per cent v/s 5.6 per cent in 2QFY16 and private sector banks’ gross NPA ratio increased to 2.5 per cent v/s 2.2 per cent in 2QFY16. The provision expenses of public sector banks jumped 93.8 per cent sequentially,” said Asutosh Kumar Mishra, analyst at Reliance Securities.

On the other hand, gross NPAs of the six NBFCs mentioned above was stable at an average 1.6 per cent compared to 1.8 per cent in the same quarter last year.

Going ahead, NBFCs’ financial performance will continue to outdo PSU banks. They will not only benefit from base rate cuts executed by the banks on the one hand but also revival in rural demand besides healthy growth in retail demand. This will take care of higher provisioning arising out of the lower bucket recognition of NPAs (from 180 to 150 dpd by March 2016). Axis Capital’s best picks are Cholamandalam Finance and LIC Housing Finance.

Public sector banks are expected to continue to witness stressful times. Daljeet Kohli, head of research at India Nivesh Securities believes the worst is not over for PSU banks. “Most of the PSU banks are yet to recognise significant amount of AQR (asset quality review of RBI) slippages in Q4FY16 (based on the management commentary of most of PSBs). Even Ex-AQR, slippages continue to remain higher, which indicates that the pain is not over. Assets which were restructured based on principal moratorium or interest moratorium or both in the last three to four years are turning bad (average range of slippage from restructured book in last few quarters at 15-25 per cent,” he said.

According to Kohli, State Bank of India, State Bank of Mysore, State Bank of Travancore, Bank of Baroda, Indian Bank, Canara Bank, IDBI Bank and Union Bank are the better of the lot while the rest are ‘complete avoids’.

Mishra of Reliance Securities continues to prefer consumer business focused private banks, especially those with higher exposure to consumer loans. HDFC Bank, IndusInd Bank and Federal Bank are its top picks.

Published on February 22, 2016
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