Don't rush to buy PSU bank stocks yet

'Investors should not commit fresh money to these stocks right now, unless they can hold for the next three to four years.'
Puneet Wadhwa and Deepak Korgaonkar report.

Illustration: Dominic Xavier/Rediff.com

Shares of public sector banks (PSBs) bounced back on Tuesday with Bank of India (BoI) surging 15 per cent intra-day on reports of recovery of Rs 70 billion in non-performing assets (NPAs).

The rub-off effect was seen across the board as the Nifty PSU Bank index, the largest gainer among sectoral indices, gained 5.6 per cent intra-day, finally settled 2.3 per cent higher compared to a 0.05 per cent rise in the Nifty50 index.

Among individual stocks, BoI, Bank of Baroda, Andhra Bank, Union Bank of India, Oriental Bank of Commerce, Canara Bank, Allahabad Bank and Syndicate Bank were up 5 to 10 per cent on the NSE.

Analysts say the bounce-back in these stocks should not be taken as a trend reversal as nothing has changed overnight fundamentally in these counters.

For investors who do not own these stocks, it is advisable to remain on the sidelines for now, they suggest.

"Nothing is looking healthy as far as the business fundamentals for these banks is concerned. They have not been completely capitalised yet. Business-wise, their key go-to product is the corporate loan, which now they will be shy to give given the recent fraud/scam. The next one year will be a challenging period for them," says Amar Ambani, head of research at IIFL Investment Managers.

Analysts expect the banks to provide for NPAs aggressively. In case of any negative events going ahead, they expect the sentiment in these counters to get hit further.

"The recent RBI guideline is that the banks will have to provide for the possible NPA upfront. That apart, I expect the PSU banks to report around Rs 300 billion in treasury losses in the March quarter," Ambani adds.

"Investors should not commit fresh money to these stocks right now, unless they can hold for the next three to four years," advises Ambani.

The PSU bank index hit a fresh 19-month low on Monday and has fallen 18 per cent since February 14 on reports of cheating/fraud cases in several government-run banks.

In comparison, the S&P BSE Sensex and the Nifty 50 has lost 1 per cent till Monday.

Punjab National Bank, Bank of India, Union Bank of India, Canara Bank, Andhra Bank and Allahabad Bank saw their market value decline between 26 per cent and 42 per cent during this period.

Though most experts remain bullish on the banking space from a long-term perspective, they suggest investors be selective and buy only those banks whose NPAs are at a manageable level and there is credit growth/earnings visibility.

"One has to be selective as regards PSU banks now. The bounce seen on Tuesday can be short-lived. Price-to-adjusted book value per share of less than three; healthy growth in credit and earnings; and net worth more than net outstanding NPAs are the three important criteria one should look at before investing in PSU banks," says G Chokkalingam, founder and MD, Equinomics Research.

Of the lot, he is bullish on Indian Bank, Vijaya Bank and Syndicate Bank.

Out of 21 listed PSU banks, as many as seven banks -- Andhra Bank, Union Bank of India, UCO Bank, United Bank of India, Dena Bank, Bank of Maharashtra and Corporation Bank -- have hit over five-year lows in the recent sell-off.

These 21 PSU banks saw a combined market cap erosion of Rs 931 billion to Rs 3,921 billion on Monday.

• MONEY TIPS

Analysts at Emkay Global, too, remain underweight on PSU banks and prefer private banks instead, which they feel are favourably positioned from a growth perspective and should continue to gain market share incrementally as compared to their PSU peers.

'We find ICICI Bank and Federal Bank at attractive levels, while HDFC Bank and IndusInd Bank remain our preferred picks. We believe Yes Bank is a potential re-rating story, given the valuation gap with its peer IndusInd Bank,' Emkay Global said in a recent report.