IIFL Wealth is now 360 ONE Wealth. We’re updating our website and it’s new version will be live soon.

PSU banks surge. Don't rush to buy the shares on a bounce, caution analysts

Shares of public sector banks (PSBs) bounced back on Tuesday with Bank of India surging 14 per cent on reports of recovery of Rs 70 billion in non-performing assets (NPAs). The rub-off effect was seen across the board as Nifty PSU Bank index, the largest gainer among sectoral indices, gained five per cent compared to around 0.35 per cent rise in the Nifty 50 index in intra-day deals.

Among individual stocks, Bank of Baroda, Andhra Bank, Union Bank of India, Oriental Bank of Commerce, Canara Bank, Allahabad Bank and Syndicate Bank moved up in the range of eight per cent to 12 per cent on the National Stock Exchange (NSE).

Analysts say the bounceback in these stocks should not be taken as a trend reversal as nothing has changed overnight fundamentally in these counters. Investors who do not own these stocks, it is advisable to remain on the sidelines for now, they suggest.

"Nothing is looking healthy as far as the business fundamentals for these banks is concerned. They have not been completely capitalised yet. Business-wise, their key go-to product is corporate loan, which now they will be shy to give given the recent fraud/scam. The next one year will be a challenging period for them," says Amar Ambani, head of research at IIFL Investment Managers

That apart, analysts expect the banks to provide for NPAs aggressively going ahead. In case of any negative events going ahead, they expect the sentiment in these counters to get hit further.

"The recent RBI guideline is that the banks will have to provide for the possible NPA upfront. That apart, I expect the PSU banks to report around Rs 300 billion in treasury losses in the March quarter.

Investors should not commit fresh money to these stocks right now, unless they can hold for the next three-four years," Ambani of IIFL adds.

The PSU bank index hit a fresh 19-month low on Monday and has fallen 18 per cent since February 14 on reports of cheating/fraud cases in several government-run banks. By comparison, the S&P BSE Sensex and the Nifty50 have lost around one per cent till Monday.

Punjab National Bank (PNB), Bank of India, Union Bank of India, Canara Bank, Andhra Bank and Allahabad Bank saw their market value decline between 26 per cent and 42 per cent during this period.

Though most experts remain bullish on the banking space from a long-term perspective, they suggest investors be selective and buy only those banks whose non-performing assets are at a manageable level and there is credit growth/earnings visibility.

"One has to be selective as regards PSU banks now. The bounce seen on Tuesday can be short-lived. Price-to-adjusted book value per share (P/BVPS) of less than three; healthy growth in credit and earnings; and networth more than net outstanding NPAs are the three important criteria one should look at before investing in PSU banks," says G Chokkalingam, founder and managing director at Equinomics Research. Of the lot, he is bullish on Indian Bank, Vijaya Bank and Syndicate Bank.

Out of 21 listed PSU banks, as many as seven banks - Andhra Bank, Union Bank of India, UCO Bank, United Bank of India, Dena Bank, Bank of Maharashtra and Corporation Bank - have already hit over five-year lows in the recent sell-off. These 21 PSU banks saw a combined market-cap erosion of Rs 931 billion to Rs 3,921 billion On Monday. The total market capitalisation of these banks stood at Rs 4,753 billion as on February 12, 2018.

Analysts at Emkay Global, too, remain underweight on PSU banks and prefer private banks instead, which they feel are favourably positioned from a growth perspective and should continue to gain market share incrementally as compared to their PSU peers.

"We find ICICI Bank and Federal Bank at attractive levels, while HDFC Bank and IndusInd Bank remain our preferred picks. We believe YES Bank is a potential re-rating story, given the valuation gap with its peer IndusInd Bank," they said in a recent report.


 

Read the original article:

Business Standard