Public Sector Banks: the joker in the pack?
Disappointment is the only outcome when your favourite team loses or your favourite stock falls.
If you are a die-hard supporter of the Indian cricket team, you must have had a heart-break last weekend, when India lost a T20 match against Pakistan.
Robinhood investors that played the stock market rally like a T20 match for the past 18 months seem to be suddenly finding themselves caught off guard. After all, stock market investing isn’t a T20 but rather a test match.
Lots of stocks have come under pressure despite showing reasonably good performance in Q2FY22, due to sky high expectations of investors that reflect in valuations.
However, the banking sector has broadly remained resilient, barring some exceptions. Within the banking space, Public Sector Banks (PSBs) are making a huge comeback.
And much like the underdog Pakistan cricket team turned the tables, undervalued PSBs, seem to be finding a spot on investors’ radars.
Going by the changes in the shareholding patterns of Public Sector Banks (PSBs), a marquee investor—Life Insurance Corporation (LIC)—has been bottom-fishing in this space. Interestingly, LIC has pared its stake in the country’s largest private sector bank.
But more than who’s buying a stake in a company, it’s important to see how the company performs and whether it has a strategy to reward shareholders in the long term.
Let’s see how the performance of PSBs has been in Q2FY22?
Well, the performance of PSBs that have declared their Q2FY22 numbers so far hasn’t been uniform. There are some hits and some misses as well.
For instance, a healthy deposit growth, stable credit quality, adequate provisioning, planned fund raising and improving macroeconomic conditions worked well for Canara Bank.
Canara Bank reported a 1.8% rise in Net Interest Income (NII) and a 13% rise in its net profit on a Quarter-on-Quarter (Q-o-Q) basis. Its fee income rose 9.4% Q-o-Q from Rs 1,337 crore to 1,463 crore. The bank’s asset quality has remained stable and the management has guided for some improvements, going forward.
Fresh slippages of the bank increased to Rs 6,525 crore from Rs 4,253 crore in Q1FY21. Despite this, the net NPAs reduced from Rs 22, 434 crore to Rs 20,862 crore—thanks to a massive surge in recoveries in Q2FY22, besides upgrades.
Canara Bank has a capital raising plan of Rs 9,000 crore for FY22.
It has already raised Rs 4,000 crore—Rs 2,500 crore through Qualified Institutional Placement (QIP) and Rs 1,500 crore by way of additional tier-1 bonds.
Canara Bank had rallied before it declared its Q2 numbers and has flared up post earnings even when the market conditions are jittery.
It has declared Rs 255 as its book value per share. In other words, the stock still trades below its book value.
But not all PSBs trading below their book value are catching the attention of investors. Take the example of Bank of Maharashtra for instance.
The performance of Bank of Maharashtra was mixed. The bank reported a 6.7% rise in NII and its Net Interest Margins (NIMs) improved from 3.05% to 3.27% sequentially. The bank raised Rs 403 crore through QIP in the recent past at Rs 23.7 per share.
That said, a 25% increase in the SMA (Special Mention Accounts) position is a key monitorable since it gives an idea about the potential stress on the bank’s asset quality for the coming quarters. The stock performance pre and post earnings suggests that investors have remained cautious.
On the other hand, the street hasn’t reacted positively to Punjab National Bank’s numbers. The bank has reported a fall of 24.9% in NII, year-on-year and a drop of 12.2% sequentially.
Its provisions, other than tax, fell from Rs 4,980 crore in March 2021 to 3,261 crore in September 2021. As a result, the net profit of the bank improved from Rs 1,023 crore in Q1FY22 to Rs 1,105 crore in the quarter gone by.
Provision Coverage Ratio (PCR) including technical write-offs stood at 80.77%. The bank reported a steady decline in NPAs and credit costs. PNB’s fee income dropped 21% on a Q-o-Q basis.
Now all eyes are on the country’s largest lender, SBI, which is expected to report its September quarter performance on November 03, 2021. The bank’s commentary on the credit market scenario and asset quality trends needs to be monitored carefully.
Are there other tailwinds for PSBs?
As you would know, talks of privatization of PSBs have been going on for quite some time now but that is rarely reflected in the valuations of PSBs. However, the perception seems to be changing after the privatization of the national carrier, Air India.
With Rs 30,600 crore of government guarantees, National Asset Reconstruction Company (NARCL) is expected to help free-up the resources of PSBs blocked in NPAs, which is another positive.
Where do PSBs stand at present?
Over the last decade PSBs have proved to be immense value destroyers.
But now that they are finally seeing some sunshine at the end of the tunnel on their asset quality front, they can envision a new growth cycle.
They have a dominant position in corporate lending. PSBs have a strong foothold in semi-urban and rural areas which offers them an edge in an under-penetrated credit market like India.
Most importantly, PSBs have been raising capital and upgrading their technological capabilities.
Connecting the dots…
If we are experiencing a correction within a bull market at present, overbought stocks which are unable to justify their valuations are likely to see the most shave-offs.
Under-owned PSBs which are doing well but are available at low valuations are showing resilience. Will sector rotation make them attractive as and when markets recover?
Should PSBs do well on the financial front and manage their asset quality, will their valuations suddenly start looking attractive to you?
Remember, not all PSBs are at the same stage of recovery.
You may also like to read: Q2FY22 earnings of India Inc say ‘No, inflation isn’t transient!’
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