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Time to turn bullish on PSU banks after Cabinet clears Rs 30,600 crore-guarantee for bad bank


Time to turn bullish on PSU banks after Cabinet clears Rs 30,600 crore-guarantee for bad bank

With the cupboard giving the go-ahead to government guarantees for security receipts of Rs 30,600 crore, the non-performing asset (NPA) burden of state-run banks is predicted to ease, making PSU bank stock a beautiful buy, experts said.

Experts said the choice on the so-called bad bank that came each day after a government extended a four-year moratorium on payment of dues by telecom players was a positive trigger and PSU banks can even outperform private lenders.

“Indian PSU banks have always been underperformers thanks to high NPAs on their books and have always been traded at an honest amount of discount to industry price-to-earnings (PE). Now the announcement of bad bank and government guarantee for security receipts issued by NARCL is predicted to enhance the prospects of PSU banks going forward,” said Rahul Sharma, Co-Founder at Equity99.

The Cabinet on September 16 approved a government guarantee for security receipts to be issued by National Asset Reconstruction Company Ltd (NARCL).

“We also are fixing an India Debt Resolution Company Ltd to manage the Non-Performing Assets (NPAs). during this company, public sector banks (PSBs) and state-owned financial institutions will own 49 percent stake,” minister of finance Nirmala Sitharaman said. Private sector banks also will hold a stake within the so-called bad bank.

The market cheered the choice because the Nifty PSU Bank index rallied 8.4 percent in two straight sessions on September 15 and 16. Banks also heaved a sigh of relief after the govt on September 15 offered the telecom industry a four-year moratorium on payment of adjusted gross sales (AGR) and spectrum dues starting October 1. Several PSU banks have large exposures to telecom service providers.

The Nifty PSU Bank index, however, saw a correction on Citizenship Day closing 3 percent down on profit booking and selling pressure. The index an enormous bearish candle after two days of strong bullish candles.

Sharma said they’re highly bullish on PSU banks and them to outperform even a number of the private-sector lenders.

Also read: IBA moves RBI seeking licence to line up Rs 6,000-crore NARCL; approval likely in next few weeks

“The Cabinet approval for security receipts may be a welcome move for PSU banks because the NPA problem was a serious issue for these banks and was hampering the performance of this segment at large,” said Gaurav Garg, Head of Research at CapitalVia Global Research.

“With this move, the balance sheets of those banks may lose their excess baggage of non-performing assets (NPAs) with 15 percent cash payment from NARCL and remaining as security receipts guaranteed by the govt of India, therefore the overview of this segment looks good and investors may make positions during this space.”

NARCL cannot solve the bad-loan problem because the solution would be banks giving out good credit, which is feasible by better governance and improved management, he added.

Santosh Meena, Head of Research at Swastika Investmart, too, said the bad bank may be a positive trigger for PSU banks and therefore the overall economy. This event might be a long-term positive trigger for PSU banks and therefore the infrastructure sector, Meena said.

What to pick?

The country’s largest lender depository financial institution of India is essentially the highest pick within the PSU banking space. “SBI will remain our top pick within the banking sector and it’s going to outperform most of the private banks in coming years,” said Meena.

Sharma of Equity99 likes depository financial institution of India also as Canara Bank.

Garg said investor should check out PSU banks immediately because the valuations of public sector banks are quite attractive as compared to non-public banks.

“The P/E multiples of most PSU banks are within the range of 10-17 times, whereas most of the private banks are having P/E of quite 20 times. With an honest solution to the NPA problem investors can now prefer PSU banks,” he said.

Garg advising buying depository financial institution of India with a target of Rs 512 and Bank of Baroda with a target of Rs 105.

“The depository financial institution of India is one among the most important public sector banks within the country, the stock looks fairly valued with P/E of 16.6 and P/B of around 1.5. The stock has been showing consistent growth within the net income and EPS also therefore we advise long position within the stock with Target of Rs 512,” he said.

In case of Bank Of Baroda, he said the lender seems to be another fairly valued stock within the space with P/E of 13 times and P/B value of 0.5 which looks quite attractive. “The stock is forming a cup and handle pattern on its monthly charts and thus we advise long position within the stock with target of Rs 105.

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