SBI, Bank of Baroda may pull a laggard PSU bank index. But it’s a bear-market rally, not a bull run.

 By: 

Prashant Mukherjee

Assistant Editor - Energy, ET Prime

The Nifty 50 hit a lifetime high at 13,150 levels this week, but for investors in shares of governmentowned public-sector banks, it has been a huge disappointment. Even a mere expectation of positive returns looks like a distant dream. State-owned bank stocks have been leading the list of laggards and gross under-performers in the recent equity-market rally, plagued by a slew of corporategovernance issues and ballooning bad loans. The NSE Nifty PSU Bank Index has lost nearly 49.71% in the past one year, making it the worst-performing sectoral gauge among the 11 compiled by the bourse. While the slump in public-sector banks has been well-documented, the question remains: Is the worst over and can we see shadows of green shoots now? PSU-inde performance The Nifty PSU Bank Index captures the performance of all public-sector banks traded at the bourses. It comprises 12 companies, of which State Bank of India (SBI), weighing 33.09%, and Bank of Baroda (BoB) with 17.54% weightage, command over 50% of the price movement of the index. The index was launched on August 30, 2007, but the returns since inception have been merely 1.38%. In the last ve years, the PSU bank index has posted negative 17% returns as against a 67% gain by the broader index, the Nifty 50. The Sensex has recorded a 72.73% gain in the same period. Take a look at the chart below. The chart clearly shows that price was continuously on a downtrend. The inde hit a low of 1,090 levels and has been trying to consolidate there for some time. Currently,the inde is trading at 1,450 levels, and if it holds at 1,300 levels, itis epected to reach the 23% Fibonacciratio at 1,760, and highertill 2,200, which means a potential upside of 25%-50% from the currentlevels . Rohit Srivastava, founder and strategist at IndiaCharts, explains: “The near-term move-up that is starting in PSU banks might only be wave C of an X wave long term, as seen on the Nifty PSU Bank Index. The move then is a bear-market rally and not a bull run. The second X wave since the decline started, and the last leg down in Z, will be pending. Wave C of X waves, however, can be impulsive and give quick short-term gains, and, therefore, it would be worth considering.” With technical charts indicating some short-term bounce in the PSU bank space, the two heavyweights of the index, SBI and BoB, are already showing signs of an upside momentum. SBI is the only pick among public-sector banks by all analysts because of a better balance sheet, large distribution network, increasing deposits, and hidden value of subsidiaries which it can monetise. Some broking houses have given much higher targets for SBI. Motilal Oswal sees SBI shares hitting INR425 and has a ‘buy’ rating. ICICI Securities believes SBI is well-capitalised to gain benets from any credit otake and has a target of INR421. However, it is interesting to note that all targets given by brokerage houses and analysts are above 400, but the stock has never happened to breach INR350-INR360 levels in the last 10 years after attempting a breakout four times. This marks as a multi-year resistance for the stock. At this point, if the stock does not break 220, it is ready for an upside move towards 290 levels. Low investor interest Shares of government-run banks are down up to 90% in the last 10 years. None of them has delivered positive returns on ve-year, three-year, and even one-year bases. Five out of 12 public-sector banks are trading near the face value of their equity shares on bourses regardless of a rally in benchmark indices. Indian Overseas Bank is trading below the face value of INR10 per share. The Chennai-based bank tapped the market rst in September 2000, oloading part of the government stake at par or at the face value of INR10. The remaining four public-sector banks — Bank of Maharashtra, UCO Bank, Punjab & Sind Bank and Central Bank of India — are trading near INR10 per share. One of the reasons for low interest of investors in these stocks is limited free oat, an analyst says, adding that most of the banks have a government holding of over 90%, leaving a small number of shares for the public to trade. Analysts and investors are mostly steering clear of PSU bank stocks even when they trade at dirt cheap prices after a heavy battering. They fear aggressive lending to MSMEs will only add to the pain of these lenders, which are already ailing because of lack of capital, mounting NPAs, declining asset quality, and weak balance sheets. The bottom line Bad loans have become synonymous with the banking sector and follow the economy trend. In FY04 and FY08, as the economy boomed, NPAs dropped from 7% to around 2% of the total advances of loans made by banks. However, from 2008-09 onwards, NPAs increased rapidly. For the rst half of FY17, bad loans constituted more than 9% of total advances. The problem was more severe in publicsector banks, where NPAs rose around 12% of total advances for the rst half of FY17. SBI, Punjab National Bank, IDBI Bank, and BoB accounted for 47.4% of NPAs at the end of June 2018. While the domestic equity market has come out of the Covid-19 impact, with stocks across the board logging record highs, the PSU bank counter remains gloomy, with no sign of any relief rally. According to Jaikishan Parmar, senior equity analyst at Angel Broking, public-sector banks have been lending to MSMEs on a large scale. “Due to a bleak outlook for the sector after Covid-19, it is going to be a tough road ahead for them,” he says. Public-sector banks will require capital, as most of the loans across the system are under moratorium and the government may announce a recapitalisation programme for the banks to infuse capital, possibly through recap bonds. “PSU banks are in terrible shape. Most stocks are touching 52-week lows and there are no signs of bottoming out,” says Manan Chadha, analyst at Nirmal Bang. In the private-sector bank index, most of the heavyweights, such as HDFC Bank, ICICI Bank, and Kotak Mahindra Bank, are touching new highs. Most experts, however, do not expect PSU banks to bottom out soon. They advise to avoid the sector entirely.  

Source: https://economictimes.indiatimes.com/prime/money-and-markets/sbi-bank-of-baroda-may-pull-a-laggard-psu-bank-index-but-its-a-bear-market-rally-not-a-bull-run-/primearticleshow/79432821.cms?utm_source=newsletter&utm_medium=email&utm_campaign=prime_dailynewsletter_paid&utm_content=heading_14&ncode=ae88c8a4f8742a8682bf7d9294253f7f