PSU Banks: value bargains or value traps?
Market perception can be a boon or a curse for the valuation of a company depending on how investors perceive its future. Going by the valuations of PSU Banks at present, it seems investors don’t have any hopes left from them.
PSU Banks, indeed, have been wealth destroyers over the last one decade. Deterioration in their performance got aggravated in the past few years which is clearly visible in the relative underperformance of Nifty PSU Bank index vis-à-vis Nifty 50.
PSU Banks: down and out?
Value of Rs 10,000
Data as on November 17, 2020
State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), Canara Bank and Union Bank collectively account for 81% of Nifty PSU Bank Index. Except for SBI, the rest of them are trading close to their decade lows. Moreover, smaller PSU Banks such as Bank of Maharashtra, Indian Overseas Bank and UCO Bank, among others, are revolving around their face values (of Rs 10).
PSU Banks are quoting at mouthwatering valuations, beyond a doubt; however, the moot question is do they really offer any value or are they a huge value trap?
After all, they have been getting low valuation multiples due to government ownership, quality of governance, asset quality woes and poor capital planning. Delays in the resolution of NPAs with NBFCs and slowing consumption rubbed the salt into the wounds of PSBs in the recent past.
Besides aforesaid issues, some PSU Banks have an extremely low free-float, which could also be a discouraging factor for some investors.
Low free float: Time to divest?
Data for the quarter ended on September 30, 2020
Not all’s lost, though.
In fact, leading PSU Banks such as SBI, BoB and PNB have reported strong numbers in Q2FY21. Their Net Interest Incomes (NIIs) have grown at a healthy pace. The proportion of low-cost deposits in their overall deposits has increased Year-on-Year (YoY). The change in Provision Coverage Ratios (PCR) on a YoY basis suggests that the leading PSU Banks have made adequate provisions to cover their bad loans.
PSU Banks: Ready to make a comeback?
CASA: Current Account Savings Account; NII Net Interest Income; NIM Net Interest Margins; PCR Provision Coverage Ratio
CAR: Capital Adequacy Ratio
(Source: Company records)
The health of PSU Banks is extremely critical for the speedy recovery of the Indian economy. Despite their sorry state at present, PSU Banks still enjoy a market share of 66% in deposits and 61% in advances. SBI alone commands 22.84% market share in deposits and 19.69% in advances. India’s credit to GDP ratio is merely 50% and some experts opine that it should at least double if India aims to attain and maintain high economic growth in future.
Most of the PSU Banks have an impressive branch network in the rural and semi-urban clusters and they are likely to play an instrumental role in India achieving a high penetration of banking services. For instance, BoB makes up 14.35% of total Jan Dhan Accounts yet its zero balance accounts are just 5.4%. Close to 61% of PNB’s branches are in rural and semi-urban markets. Nearly one in every three home loans disbursed in India is by SBI and so on.
However, keeping in mind constraints on government’s ability to infuse growth capital, they might not be able to grow at the same pace as their private sector counterparts might grow, in the foreseeable future.
Back-of-the-envelope Sum-Of-The-Parts (SOTP) valuations of two leading PSU banks—SBI and Canara Bank—suggest that they offer deep values.
SBI: Most lucrative PSU Bank?
Current Market Price: Rs 240
(Source: Ventura Research)
Canara Bank: Quoting at throwaway valuations?
Current Market Price: Rs 93
(Source: Ventura Research)
Will market perception change?
PSU Banks are often blamed for their slow adaptation of technology.
SBI may stand out here.
Do you know, YONO (You Only Need One) application has 2.1 crore registrations? In FY20, YONO saw 60 lakh log-ins on an average every day. Pre-Approved Personal Loans (PAPLs) worth Rs 9,694 crore were disbursed through YONO in FY20. Can digital platforms of SBI offer value-unlocking opportunity in future, since it caters to ‘banking and beyond’ needs of customers?
Canara Bank isn’t far behind. It has experienced a 93% jump in the Mobile Banking user base in FY20. The Bank has been focusing on instant online account opening, which eliminates the need to visit a branch. Canara Bank endeavours to improve its processes, structure and offerings using digital technologies.
BoB has also undertaken a digital transformation which includes setting up a dedicated digital lending department to exclusively cater to on-boarding of customers and loan-processing for retail and MSMEs. The bank is hopeful that its digital transformation will help it reduce turnaround time besides helping lower costs.
Populist schemes often spoil the credit behaviour of borrowers hence their impact remains a crucial factor for PSU Banks to track. Good credit behaviour beyond pandemic would be value accretive for PSU Banks.
Despite an improved economic outlook in the unlock periods, the credit growth has remained muted so far. As per RBI data, non-food credit growth stood at 5.8% in September 2020 as compared to 8.1% in September 2019. Banks might experience a lag of say 6-8 months in credit growth, depending on a number of factors, such as the pace of economic growth and containment of virus being the primary ones.
If India is to witness any boom in manufacturing and experience an improved penetration of financial services, PSU Banks will have to substantially up their game. They are strong deposit franchises and have been the backbone of agriculture, industrial and MSME credit. PSU Banks which can deliver tangible improvements in three areas—governance, capital planning and asset quality—and manage to record higher credit growth, might witness a substantial re-rating.
Patience is the name of the game.
You may also like to read: Bandhan Bank: bonding with the bulls again?
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
Consult your financial advisor before taking any investment decision.
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.