Is there more upside left in public sector bank stocks?

State-owned bank stocks have gained 30% in a month, post the recap announcement

Published 6 years ago on Nov 23, 2017 1 minute Read

Kajal Gandhi, vice-president (research), ICICI Securities

There is still more upside left in the public sector bank (PSB) stocks. In Q2FY18, we have seen few banks reporting credit growth higher than industry growth (4.2%). If this growth is sustained over the next few quarters, and rates also stabilise, the pre-provision operating profit numbers will be quite higher. We cannot evaluate PSB stocks purely from an earnings perspective, as provisioning is a continuous and long-drawn process. A good resolution of 2-3 companies under the National Company Law Tribunal in the next year is likely to result in further write-back. This will balance the incremental provisions needed for some other banks. If operationally things are improving, and growth visibility upgrades, further upsides can be seen. While private sector banks will also benefit in the process, PSU banks will do better as they have witnessed subdued performance for a very long time.

Ajay Bodke, CEO, Prabhudas Lilladher

While the recap announced for public sector banks will take care of provisioning needs, a sustainable outperformance of PSB stocks is dependent on a large number of incremental structural reforms. These include a major overhaul of human resource management policies and expediting the process of consolidation in the fragmented PSB space. Emergence of three to five large-sized state-owned banks, post-consolidation, will ensure that they compete fiercely with private sector players and aggressively defend their market share. Despite the recap, the provisioning requirement for PSU banks will continue to stay elevated. But for a short-term trading perspective given the low valuation and under-ownership of PSB stocks, they can’t be a part of an investor’s core portfolio unless the government unveils a time-bound roadmap for structural reforms.