Rising bond yield to impact PSU banks

In the banking sector, one trend that is clearly visible is that private sector banks are reporting far stronger earnings than public sector banks. Perhaps, it is due to the way PSU banks deal with their treasury book operations and the amount of money they have marked to held-to-maturity.

Hemendra Hazari of Karvy Stock Broking believes that government banks will be impacted by rising bond yield because they have a much higher proportion of investments and their durations are higher too.

Hazari is optimistic on government banks such as Bank of India, Union Bank of India and Bank of Baroda as these banks will see a decent growth in earnings.

Excerpts from CNBC-TV18's exclusive interview with Hemendra Hazari:

Do you agree that public sectors banks are pinning down and how much of an impact on earnings do you expect?

Government banks will be impacted by rising bond yield because they have a much higher proportion of investments and their durations are higher too.

Moreover, on account of political pressures, in a rising interest rate scenario, the banks' management must have the freedom to re-price their loans in line with the market rate.

Fortunately, what we have seen is

that government banks have prolonged this for a long time and it is impacting their margins. This was seen in Q4 and although some of the government banks increased their prime lending rates in the beginning of Q1 this year, in my view, it was not enough. So one will also see some margin pressure in Q1.

So unlike private sector banks, one will find that the government banks would have pressures on two fronts; on their bond losses as well as some margin pressures because they have not been as proactive in repricing their loans upwards as private sector banks have been.

On this parameter; volume growth in specific, which one would be your top picks from the banking industry now?

At the moment we are positive on government banks namely Bank of India, Union Bank of India and Bank of Baroda because we believe that these banks will see a decent growth in earnings as well as the investment mark-to-market losses would be considerably lower than the other government banks.

We are also positive on some of the older private sector banks like Karur Vysya Bank and some smaller banks like City Union Bank.

For more on markets & business, log on to www.moneycontrol.com.