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PSU Banks Analysis for 2018

In last few days, market has been so confusing that even stoplosses were also not proved to be a good method for traders to secure their money. For instance, on 16 May, rcom was trading at Rs 10. And almost after just two days, stock had made high of Rs 21. If you think “ADAG is always tend to volatile one, and so what was that special”, then you can also take examples of many other stocks.

On 18 May, PNB was trading around Rs 74.50. However on 28 may, it was around Rs 89. In BOI also, we have seen same kind of buying interest. From 18 may to 28 may, this stock had also surged over 15 percent. Not only these two, many PSU banking stocks on 18 May had taken a deep fall. But, 19 may onwards, short-term trend in PSU banks has now become little positive.

Most of the PSU Banks like SBI, PNB, IDBI etc have already announced their results. Some of them have posted a loss around some Rs1000-2000 crore but banks like PNB have posted a loss of over Rs 5000 crore which is really quite bad despite that it is largely due to recent fruad executed by Nirav modi and his uncle. The reason behind why banks which didn’t get affected due to Nirav Modi scam also reported a huge loss in Q4 is very simple. In Q4, PSU banks have done lot of provisioning to maximise their future stability as much as possible.

Now, when PSU banks have reported such a high amounting loss in Q4, the question arises then why PSU banking stocks have seen some recovery in last few days. As per latest RBI Guidelines, it is important for Banks to make 50 percent provisioning for the loans/Debtors who are in NCLT for Insolvency and Bankruptcy proceeding (In some cases, banks are also making provisioning of 55-65 percent). However, as we have seen in case of Bhushan Steel, more than 60 percent of total debt is getting recovered for banks which would be considered somewhere a good one Revival plan for both Bhushan Steel and its lenders.

In some cases, there are also expectations that Banks would be able to recover only 30-50 percent of total money for which banks have already made higher provision in Q4. However, in most of the cases, banks would be able to recovery much more money than they have written off. Banks have made higher provisioning of which a great amount of money is expected to be written back soon. It will happen when revival plans of many Bankrupt companies will get thumbs up from all the parties. It is a big plus point for PSU banking stocks.

In Q4, many PSU Banks have made provisioning for those Advances also which have lower chances to get converted into NPA one. Maybe, this step of making higher provision could last for one quarter more in some banks. Although, it will allow and help PSU banks to avoid from making more disrupting provisioning in future. This will in result reduce the risk of discovery of more NPAs or Bad debts in corporate loans given by PSU Banks which is also a plus point for holding few PSU banking shares for next few quarters.

Also, because banks have now already classified all the possible loans as NPAs and have made provision in accordance with it, we could now see most of the banks turning into profitable again soon. I think at least 1-3 quarters more would be taken now by NCLT to clear basket of Bankrupt companies. But Once, this process will be over, PSU banks would have a chance to start their new journey of growth.

Valuations of Private and PSU banks

Now coming to valuations, there is no doubt that PSU Banks are really available at a very undervalued or cheap price. In Private sector, banks like HDFC Bank, Kotak Mahindra etc have a valuation of around 20 multiple of total revenue (means if HDFC Bank has a total revenue of Rs25,000 crore, than its market capital is around Rs 5 lakh crore) and have price to book ratio of 5 multiple. But in case of PSU Banks, it is very different. Banks like SBI, PNB are available at a revenue multiple of just 2 and Price/book ratio in the range of 0.5–1.5.

You can easily understand the valuation different between PSU banks and private banks by just taking the fact that if SBI in next few quarters or years make their quality as same like in Private banks, than its valuations may alone hit Rs 14-15 lakh crore market Cap (if we calculate a target for it in accordance to Private valuations)which means almost 1000 percent upside in SBI. However, in true sense it is not possible only due to the reasons that PSU banks are influnces by Political pressure and have low quality of Lending mechanism.


So, overall I think in upcoming quarters of FY19, it is possible to see in banks posting a good amount of profit. Also, because of higher provision they have made, we would see some write back of provision soon as recoverable amount from NPAs is looking higher than what banks expects (50 percent).

Although, I think FY19 could be a much better year for PSU banks. Many revival plans of Bankrupt companies are in final stages which means Banks may get their money soon from NPAs. Therefore, it is possible to see some improvement in financials of PSU banks in FY19 which will positively impact the stock prices of these Banks. Thus, this year, we can see a good improvement in shares of PSU Banks. However, to realise the full potential of these stocks, investors may need to give atleast 1-2 year time period to these stocks.

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