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The Nifty PSU Bank index lost nearly 2% on Monday on reports that the government is considering farm loan waiver in Maharashtra, fuelling concerns that the step will put additional burden on banks that are already grappling with a high level of non-performing assets (NPA).

Over the years, 24 PSU banks have amassed Rs 6.4-lakh crore of bad assets as of March 2017, AceEquity data show, up 22% year-on-year (y-o-y). Some of these banks, such as Indian Overseas Bank (IOB), IDBI Bank, Central Bank, UCO Bank and Bank of Maharashtra, had gross NPAs in excess of 15% of their total advances in Q4FY17.

On the other hand, provisions made by these 24 banks stood at Rs 5.5-lakh crore for the March quarter, up 51% over December quarter, but down 20% to Rs 6.8 lakh crore over March quarter of FY16.

In this backdrop, analysts advise investors to stay away from the sector despite attractive valuations in some cases, at least till the ongoing efforts by the Reserve Bank of India (RBI) and the government start bearing fruits, leading to visual signs of improvement in asset quality.

Over the last one year, these stocks have rallied as much as 190%. By comparison, the S&P BSE Sensex and the Nifty50 indices have gained around 17% each. Among individual stocks, Indian Bank, Vijaya Bank, Canara Bank and Punjab National Bank gained 85% to 190% during the same period.

“The recent rally in PSUs is more like a bounce after a sharp correction. These stocks are cheap because people feel that asset quality has not bottomed out, but there are question marks on growth. In an environment where the net worth of the bank is at risk, why would you give a higher multiple to it? In other words, P/B multiple is a multiple you ascribe to the book. Now when there is no sanctity of the book, what multiple shall one ascribe,” said Ankur Varman, AVP - Institutional Equity sales at SBI Capital Securities.

Despite the near-term risks, analysts remain optimistic on these stock from a long-term perspective. AK Prabhakar, head of research at IDBI Capital expects the PSU bank stocks to correct 8-10% in the short-term.

“If one is not invested in PSU banks, they should wait for two-three months. The ongoing quarter will be bad for PSU banks, and the stocks are expected to fall by 8-10%, which will make them attractive. Investors can then buy on a decline,” said Prabhakar.

Meanwhile, Finance Minister Arun Jaitley on Monday, following a meeting with the heads of PSBs, said that the RBI was at “a fairly advanced stage” of preparing a list of borrowers from whom NPAs could be recovered under the Insolvency and Bankruptcy Code. The move, he said, would help beleaguered PSBs recover part of their NPAs.

As regards farm loan waivers, Varman of SBI Capital Securities believes that banks will not be impacted by this, as states will guarantee them full reimbursement.

“On the contrary this is positive for PSU banks as now there is guarantee of money coming back and none of these loans will turn bad (a good 30% of these were 30 days past due),” he said.

Last modified on Tuesday, 13 June 2017

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