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Experts said that the Cabinet has given the green light to government guarantees for security receipts in the amount of Rs 30,600 crore. This will reduce the non-performing assets (NPAs) burden on state-run banks. It will also make PSU stock more attractive to buy.
Experts believe that the decision to close the so-called bank was positive. The move came just days after the government extended a four year moratorium on telecom players paying dues. PSU banks are capable of outperforming private lenders.
"Indian PSU Banks have been consistently underperformers because of high NPAs on the books. They have also always been traded at a large discount to the industry's price-to-earnings. Rahul Sharma, co-founder of Equity99, stated that the NARCL announcement regarding a bad bank and government guarantee for security receipts is likely to increase the prospects for PSU banks moving forward.
On September 16, the Cabinet approved a government guarantee that National Asset Reconstruction Company Ltd (NARCL) would issue security receipts.
"We also plan to set up India Debt Resolution Company Ltd in order to manage the Non-Performing Assets. Nirmala Sitharaman, Finance Minister, stated that 49 percent of the stake will be held by public sector banks (PSBs), and state-owned financial institution. The so-called bad bank will also be owned by private sector banks.
Also see: Cabinet approves a four-year moratorium on telcos paying AGR dues
The Nifty PSU bank index rose 8.4 percent in just two sessions, on September 15th and 16th. The relief felt by banks was also apparent after the September 15 announcement that the government would suspend payments of adjusted gross revenues (AGR) and spectrum fees for four years. This came as a relief to the industry. Many PSU banks have significant exposures to telecom service provider.
Nifty PSU Bank index saw a correction of 3 percent on September 17, due to profit booking and selling pressure. After two days of strong bullish candles, the index saw a large bearish candle.
Sharma stated that they are bullish on PSU banks, and expect them to outperform some private-sector lenders.
Also see: IBA moves RBI to obtain a licence for NARCL of Rs 6,000 crore; approval expected in the next few weeks
"The Cabinet approval of security receipts is a welcome step for PSU banks, as the NPA issue was a major problem for these banks and was hampering their performance," stated Gaurav Garg of CapitalVia Global Research.
"With this move the balance sheets these banks may lose the excess baggage of non performing assets (NPAs). With 15 percent cash payment NARCL and remaining security receipts guaranteed government of India, the overview of the segment looks good, and investors may take positions in this space."
NARCL can't solve the problem of bad loans. The solution is banks giving good credit. This is possible through better governance, he said.
Swastika Investmart Head of Research Santosh Meena also said that the bad bank was a positive trigger for the economy and PSU banks. Meena stated that this event could prove to be a long-term positive for PSU banks as well as the infrastructure sector.
How do you choose?
The top choice in the PSU banking sector is the country's largest lender, State Bank of India. Meena stated that SBI will continue to be our top choice in the banking sector, and may outperform many private banks over the next years.
Equity99's Sharma likes Canara Bank and State Bank of India.
Garg stated that PSU banks should be considered as an investment option as the public sector banks' valuations are much more attractive than those of private banks.
"The P/E multiples for most PSU banks range from 10-17 times, while most private banks have P/E greater than 20 times." Investors can now choose PSU banks if there is a solution to the NPA problem," he stated.
Garg advises buying State Bank of India (target Rs 512) and Bank of Baroda (target Rs 105).
The stock is fairly priced with a P/E of 16.6 & a P/B of about 1.5. He stated that the stock has shown consistent growth in net profit and EPS. Therefore, we recommend a long position with Target Rs 512.
He said that Bank Of Baroda is another attractively priced stock with a P/E value of 13 and a P/B value 0.5, which makes it look quite appealing. The stock is showing a cup-and-handle pattern on its monthly charts. Therefore, we recommend a long position with a target of Rs105.
Disclaimer: Experts on Moneycontrol.com do not represent the views or investment advice of the site. Moneycontrol.com recommends that users consult certified experts before making any investment decisions.
