Stock watch: Will PSU banks outperform private banks on stock market
That bank stocks are on a comeback path is clear. What is not so clear is which of the two - public sector banks or private sector banks - will give better returns. Experts, however, say PSU banks have many things going for them.
That bank stocks are on a comeback path is clear. What is not so clear is which of the two - public sector banks (PSBs), or private sector banks - will give better returns. While both may be good options in the current market, PSBs, say experts, have many things going for them.
THE RIGHT TIME
From the start of this year until March, while the Nifty has given a 12 per cent return, the overall banking index has delivered 26 per cent, just a tad lower than the 28 per cent returned by the PSB index.
Things seem to be heading in favour of the banking sector with the Reserve Bank of India, or RBI, lowering rates. Interest rates and bank stocks usually move in opposite directions.
Even agriculture loans are under stress, the reasons being general economic slowdown and willful delay in repayments by farmers on expectation that the government will come out with a debt waiver scheme like it did in 2008.
Agrawal of Angel Broking says referrals to the Corporate Debt Restructuring (CDR) cell have increased sharply in the first nine months of 2011-12. CDR cell is run by banks and entertains proposals for restructuring debt taken by companies.
Due to the general industrial slowdown, there could be more cases of big loan defaults such as Kingfisher. This means banks will incur higher provisioning expenses and erosion of net worth over the next few quarters.
Mid-sized PSBs with high exposure to stressed sectors and large restructured loans as a proportion of advances, such as Indian Overseas Bank, UCO Bank, Central Bank and Andhra Bank, are likely to witness higher non-performing assets, or NPAs, in 2012-13 as well, says Agrawal.
Shah of Kotak Securities says that the performance of bank stocks will depend on two factors-interest rates, a function of the government's fiscal policy and inflation, and banks' asset quality.
However, Shah feels that purely on asset quality, private sector banks are better placed. First, they have retail focus, where the risk of NPAs is low; second, they have fewer restructured loans; third, they have lower exposure to the agriculture sector.
RIGHT CALL
Taking an investment call in the banking sector will depend on your risk appetite. The PSB index is very sensitive to rate announcements, hence any activity in that space should be kept note of.
"PSB, if invested at current levels, will offer good returns but investors need to be watchful of a number of events," says Rakesh Tarway, assistant vice president, advisory, Motilal Oswal Securities.
Another positive for PSBs is valuation. Almost all mid-cap PSU banks are available at 60-90 per cent adjusted net worth. Good mid-cap PSU banks will offer better returns. Entry should be gradual, says Tarway.
If one is not sure about which individual bank stocks to buy, one has the choice of PSU banking funds like exchange-traded funds that give exposure to the entire basket of stocks in the PSU universe.
THE RIGHT TIME
From the start of this year until March, while the Nifty has given a 12 per cent return, the overall banking index has delivered 26 per cent, just a tad lower than the 28 per cent returned by the PSB index.
Things seem to be heading in favour of the banking sector with the Reserve Bank of India, or RBI, lowering rates. Interest rates and bank stocks usually move in opposite directions.
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This has happened in the past as well. The spike in the banking index from October 2008 to November 2010 was due to the soft interest rate scenario (repo rates fell from 9 per cent to 5 per cent during the period). Although analysts do not expect the slide to be so sudden this time, any turnaround will benefit PSB stocks.
If interest rates in the system fall, it will provide banks dual benefits. First, a fall in rates is good for credit growth. Second, prices of government bonds - which account for a huge chunk of banks' investment portfolio - will rise, increasing the return on investment. Similar to the inverse relationship between interest rates and bank stocks, bond prices and interest rates also move in opposite directions.
In fact, since PSBs have a huge portfolio of government securities, much larger than most private sector banks, they will gain more in the event of softening of interest rates.
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On the flip side, it was tough going for banks when the RBI was increasing rates. Between January 2010 and December 2011, when the repo rate, at which banks borrow from the RBI, was increased from 4.75 per cent to 8.5 per cent, the banking index lost 13 per cent value while the PSB index fell 23 per cent.
In the last few quarters, high inflation forced the RBI to keep rates high, leading to a fall in savings and growth, says Vaibhav Agrawal, vice president, research, banking, Angel Broking.
CAPITAL ADVANTAGE
What could also be a positive trigger for PSBs is the Rs 14,000 crore capital injection announced in this year's Union Budget. PSU banks need capital desperately to expand balance sheets. On the day of the announcement, bank stocks rose 2-4 per cent.
"Recapitalisation will not only help these banks maintain growth but also allow them to meet the more stringent Tier-I CAR (capital adequacy ratio) requirements of Basel-III norms," says Agrawal of Angel Broking.
Under the norms, Indian banks will have to maintain CAR of 9 per cent (Tier-I 7 per cent) along with a 2.5 per cent capital conservation buffer. The total requirement will be 11.5 per cent. CAR is the ratio of a bank's capital to risk-weighted assets. Tier-I capital can absorb losses without the bank's liquidation.
State Bank of India is expected to be a big beneficiary of additional capital, followed by Indian Overseas Bank, Bank of Maharashtra, IDBI Bank and Central Bank. This is because they have the lowest Tier-I ratios (less than 8 per cent) among all PSBs.
RISK FACTORS
Amid rising hopes of better times ahead, one of the worrying factors for PSBs is the possibility of increase in non-performing loans due to exposure to certain sectors. For example, the government-owned banks have lent heavily to infrastructure companies and are under stress as many projects have not taken off due to fuel shortages or lack or approvals.
There is a huge risk in stressed sectors such as infrastructure (especially power distribution companies), textiles, iron & steel and commercial real estate and hence banks may see higher loan defaults and restructuring in the coming quarters, says Dipen Shah, head, fundamental research, Kotak Securities.
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This has happened in the past as well. The spike in the banking index from October 2008 to November 2010 was due to the soft interest rate scenario (repo rates fell from 9 per cent to 5 per cent during the period). Although analysts do not expect the slide to be so sudden this time, any turnaround will benefit PSB stocks.
In the last few quarters, high inflation forced the RBI to keep rates high, leading to a fall in savings and growth.
Vaibhav Agrawal
VP, Research, Banking, Angel Broking
In fact, since PSBs have a huge portfolio of government securities, much larger than most private sector banks, they will gain more in the event of softening of interest rates.
INVESTMENT TIP: FCCBs are due, invest in those firms with caution
On the flip side, it was tough going for banks when the RBI was increasing rates. Between January 2010 and December 2011, when the repo rate, at which banks borrow from the RBI, was increased from 4.75 per cent to 8.5 per cent, the banking index lost 13 per cent value while the PSB index fell 23 per cent.
In the last few quarters, high inflation forced the RBI to keep rates high, leading to a fall in savings and growth, says Vaibhav Agrawal, vice president, research, banking, Angel Broking.
CAPITAL ADVANTAGE
What could also be a positive trigger for PSBs is the Rs 14,000 crore capital injection announced in this year's Union Budget. PSU banks need capital desperately to expand balance sheets. On the day of the announcement, bank stocks rose 2-4 per cent.
"Recapitalisation will not only help these banks maintain growth but also allow them to meet the more stringent Tier-I CAR (capital adequacy ratio) requirements of Basel-III norms," says Agrawal of Angel Broking.
Under the norms, Indian banks will have to maintain CAR of 9 per cent (Tier-I 7 per cent) along with a 2.5 per cent capital conservation buffer. The total requirement will be 11.5 per cent. CAR is the ratio of a bank's capital to risk-weighted assets. Tier-I capital can absorb losses without the bank's liquidation.
State Bank of India is expected to be a big beneficiary of additional capital, followed by Indian Overseas Bank, Bank of Maharashtra, IDBI Bank and Central Bank. This is because they have the lowest Tier-I ratios (less than 8 per cent) among all PSBs.
There is a huge risk in infrastructure, textiles, iron & steel and real estate sectors and hence banks may see higher loan defaults.
Dipen Shah
Head, Fundamental Research, Kotak Securities
Amid rising hopes of better times ahead, one of the worrying factors for PSBs is the possibility of increase in non-performing loans due to exposure to certain sectors. For example, the government-owned banks have lent heavily to infrastructure companies and are under stress as many projects have not taken off due to fuel shortages or lack or approvals.
There is a huge risk in stressed sectors such as infrastructure (especially power distribution companies), textiles, iron & steel and commercial real estate and hence banks may see higher loan defaults and restructuring in the coming quarters, says Dipen Shah, head, fundamental research, Kotak Securities.
INVESTMENT TIP: How to gain from stock inclusions
Even agriculture loans are under stress, the reasons being general economic slowdown and willful delay in repayments by farmers on expectation that the government will come out with a debt waiver scheme like it did in 2008.
Agrawal of Angel Broking says referrals to the Corporate Debt Restructuring (CDR) cell have increased sharply in the first nine months of 2011-12. CDR cell is run by banks and entertains proposals for restructuring debt taken by companies.
Due to the general industrial slowdown, there could be more cases of big loan defaults such as Kingfisher. This means banks will incur higher provisioning expenses and erosion of net worth over the next few quarters.
Mid-sized PSBs with high exposure to stressed sectors and large restructured loans as a proportion of advances, such as Indian Overseas Bank, UCO Bank, Central Bank and Andhra Bank, are likely to witness higher non-performing assets, or NPAs, in 2012-13 as well, says Agrawal.
Shah of Kotak Securities says that the performance of bank stocks will depend on two factors-interest rates, a function of the government's fiscal policy and inflation, and banks' asset quality.
However, Shah feels that purely on asset quality, private sector banks are better placed. First, they have retail focus, where the risk of NPAs is low; second, they have fewer restructured loans; third, they have lower exposure to the agriculture sector.
RIGHT CALL
Taking an investment call in the banking sector will depend on your risk appetite. The PSB index is very sensitive to rate announcements, hence any activity in that space should be kept note of.
"PSB, if invested at current levels, will offer good returns but investors need to be watchful of a number of events," says Rakesh Tarway, assistant vice president, advisory, Motilal Oswal Securities.
Another positive for PSBs is valuation. Almost all mid-cap PSU banks are available at 60-90 per cent adjusted net worth. Good mid-cap PSU banks will offer better returns. Entry should be gradual, says Tarway.
If one is not sure about which individual bank stocks to buy, one has the choice of PSU banking funds like exchange-traded funds that give exposure to the entire basket of stocks in the PSU universe.
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