PSU banks that can make for good buys now

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Publication: The Economic Times Mumbai; Date:2011 Dec 19; Section:ET Wealth; Page Number 42

PSU banks that can make for good buys now

Remember, however, to stagger your investment and pick them only if you have a horizon of over 2 years.
NARENDRA NATHAN

The stock market has punished the banking sector for a long time now. The rate tightening by the RBI, economic policy paralysis, project delays, and the imminent recession in Europe and the US have started taking a toll on the economy. The industrial production in October has contracted by 5.1%, and with the demand from the industrial sector falling, the overall credit growth in 2012-13 is expected to be below the 15% mark, putting heavy pressure on the operating income of banks. The public sector banks have been more at the receiving end than the private ones. While the economic slowdown will increase the nonperforming assets across the industry, the PSU banks may be affected more because of the lack of a strong system in place. Besides, they will face political pressure to distribute more loans to vulnerable sections. They also have a high exposure to the power sector, which is facing a tough time. Since most PSU banks have a large

Bank of Baroda
While most analysts are bullish on Bank of Baroda, it is not very cheap like other public sector banks. Its price to book value ratio is still above 1. BoB is the best among the public sector banks and its higher valuation (compared to other PSU banks) is a reflection of its better fundamentals, says savings account component, the recent RBI move to free the savings bank rate is also bad for them. Have all these negatives already been priced in? Yes, say the market experts. With valuations coming down to much lower levels, most of the negatives are priced in, says Raamdeo Agrawal, JMD, Motilal Oswal Securities. So the price to book ratio of most public sector banks is below 1. While the performance depends on the overall market in the short to medium term, giving the current valuations, PSU banks should outperform the broader market in the long term, says Tejas Doshi, VP, institutional research, Sushil Finance. However, the macro headwinds are expected to continue for a few more months. The capital infusion also looks difficult in this fiscal year. Instead of getting in with full force, investors should stagger their investments in this segment. Only those with a horizon of more than 2 years should get in. More importantly, you need to be choosy, which is why we talked to the analyst community to select some stocks for you. Nilanjan Karfa, banking analyst, Brics Securities. While most PSU banks are reporting a huge rise in NPAs, Bank of Baroda has managed to contain it. Its gross NPA and net NPA for the second quarter of 2011-12 has moved up only by 2 bps and 9 bps to 1.4% and 0.47%, respectively. The total restructured advances were also a negligible 0.51% of the total advances.

Allahabad Bank
Though there was a spike in Allahabad Banks NPAs in the previous

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quarter because of complete migration to system-based NPA recognition method, the asset quality is still at a comfortable level. Its gross NPA and net NPA are 1.77% and 0.69%, respectively. The cumulative restructured portfolio is at 3% of its gross advances, which is in line with the

Corporation Bank
Despite its weak fundamentalsit reported an earnings growth of 5% in the second quarter of 2011-12analysts are getting bullish on the counter. We are bullish on the counter mostly because of its very low valuation, says Dinesh Shukla, banking analyst, Sharekhan. The stock is quoting at a PE of 3.51 and PB of 0.71. However, the stock may

Indian Bank
Among the smaller public sector banks, Indian Bank is the analysts choice. It can boast several positive factors like strong balance sheet, consistent performance, and conservative management, says Tejas Doshi, VP, institutional research, Sushil Finance. It reported a 15% net profit growth in the second quarter of 2011-12. It was also among industry average. More importantly, it showed a net profit growth of 21% in the second quarter despite the spike in NPAs, and analysts feel this positive factor is not fully discounted by the market. It is quoting at a reasonable valuation, given that its earning is expected to grow at 19.5% annually in 2011-13. Its return on equity is also likely to remain healthy at around 21% in 2012-13, says Saday Sinha, banking analyst, Kotak Securities. underperform other public sector banks in the short term and investors need to stagger investment to 4-6 months. This is because the operating performance of the bank is expected to remain weak for the next few quarters. Besides, asset quality concerns also remain and further slippages cant be ruled out, that is, it will impact business growth and volatility in earnings. the public sector banks that went for a system-based NPA recognition method in the first batch and migrated to the new system in the first quarter of 2011-12. So the probability of a negative surprise due to this is very less. However, its restructured loan portfolio stood at 6% of its total advances, one of the highest in the industry, and it remains the main concern.

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PSU banks that can make for good buys now

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