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PSBs leave India Inc FY18 scorecard in red

Lokeshwarri SK BL Research Bureau | Updated on June 10, 2018

As lenders face many uncertainties, fund managers advise stock-specific approach

India Inc’s scorecard for 2017-18 has been marred by the performance of public sector banks (PSBs). Of the top 10 loss-making companies in the S&P BSE 500 index, nine were PSBs, the only non-bank entity being debt-laden Reliance Communications.

According to data sourced from ACE Equity, the aggregate net profit of companies in the S&P BSE 500 index declined 1.78 per cent in FY18 over FY17. It had risen 17.4 per cent in FY17 from FY16.

However, if the earnings of PSBs are excluded, this basket’s earnings for FY18 grew 12.68 per cent. The Q4 FY18 earnings of PSBs were particularly hammered by the RBI’s February circular that revised the guidelines for recognition of stressed assets.

Losses at record levels

The total losses of PSBs in the BSE 500 index in FY18 amounted to ₹79,745 crore. This is a sharp increase from the losses of ₹10,769 crore and ₹15,964 crore recorded by this set of banks in FY17 and FY16 respectively.

While scam-hit PNB led with a record loss of ₹12,130 crore in FY18, others, such as IDBI Bank (₹8,132 crore), IOB (₹6,299 crore), Bank of India (₹5,961 crore) and Oriental Bank (₹5,871 crore), were also deeply in the red. “With big losses being reported by PSU banks in FY18, most banks have reported a depletion in their capital level despite a large-scale capital infusion (₹88,140 crore); this will make it difficult for them to comply with the Basel III requirement and they will require more capital,” says Nitin Aggarwal, Vice-President (Research), Motilal Oswal Institutional Equites.

“The recent RBI announcement on a change in the practice of valuing State government securities can also lead to higher mark-to-market losses for the banks.”

Mutual fund managers advise a stock-specific approach to buying PSB stocks. Mahesh Patil, Co-CIO, Aditya Birla Sun Life AMC, says: “Except for a few large PSBs, we see problems for loan growth because of lack of capital and the management being preoccupied with recovering bad loans. While most of the problem assets have been recognised and the losses should reduce, the high provisioning for past bad loans will continue to impact earnings and return ratios for the next two years.”

Patil further says the fund house prefers to refrain from PSBs except for a couple of large ones which are well capitalised and have a good management team.

S Naren, ED & CIO, ICICI Prudential AMC, concurs. Only select PSB stocks offer value at current levels, he says.

He thinks that in terms of earnings, the RoE visibility is muted for a large part of the PSB universe.

A look at MF holdings reveals that SBI was the preferred choice of most mutual fund houses, with the value of holdings increasing from ₹8,056 crore in April 2016 to ₹21,079 crore in April 2018. Other stocks that were preferred by fund houses were Bank of Baroda, Punjab National Bank, Indian Bank and Canara Bank.

 

Room for optimism?

Some experts are, however, hoping for better times ahead. “Most of the larger PSBs either have enough capital or have access to capital in the form of government support and market access,” says Vinay Sharma, Fund Manager, Reliance Mutual Fund.

Sharma also points out that despite the non-performing loans crisis, most of the larger PSBs have not seen a major dip in their customer base or deposit franchise. Once resolutions happen in bankruptcy courts, earnings will also see some recovery, he says.

(With inputs from Dhuraivel Gunasekaran)

Published on June 10, 2018

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