Is there more downside to PSU bank stocks?

Asutosh Mishra, senior research analyst, Reliance Securities

While incremental deterioration in asset quality is expected to peak-out for public sector banks (PSBs), speedy resolution will continue to impact their profitability in coming quarters. As the recent steps by the RBI and the government clearly warrant that the banks will have to accelerate their efforts to resolve issues on asset quality front, we expect further surge in provisioning expenses in FY19. Though various steps taken by the regulator are long-term positive for the PSBs, they may cause considerable short-term pain and thus keep the credit cost elevated beyond our earlier estimates. Further, continued weaker business growth, lower operating profit, subdued income from treasury operations, higher mark-to-market loss on bond portfolio and elevated credit cost may negatively impact their overall performance. We believe overall return may continue to remain depressed over next few quarters for the PSBs.

R Sreesankar, head – institutional equities, Prabhudas Lilladher

I am not bearish on public sector banks from these levels. I do not see them correcting further as there may not be much institutions left to sell public sector banks (PSBs). After the massive correction in PSBs, we are positive about State Bank of India (SBI), which we believe still has an upside. SBI’s stressed asset pool is now 1.3% of loans, down from 2.8% in Q3 and some large recoveries from NCLT accounts will help improve asset quality. Net interest income fell by 5% (YoY), though loan growth was slightly better and margins improved by 5 bps QoQ to 2.5%. The bank also reported decent other income numbers on back of core fees and recoveries from NPA. Overall, the downside seems to be capped as more or less all bad assets seems to have been recognised and we expect this to be reflected in the first half of FY19. BFSI continues to be one of our favoured sectors for both trading stocks and long-term investment holdings.