Most public sector banks have emerged as major wealth destroyers in 2019 as they have been under pressure, despite recapitalisation and rate cuts, on asset quality issues, increase in bad loans, non-performing asset (NPA) divergence issues and low visibility of profit in the near future.
On a year-to-date basis, the Nifty PSU bank index has cracked 17 percent as against a 13 percent rise in the benchmark Nifty.
Allahabad Bank, Indian Bank, Central Bank of India, Oriental Bank, Union Bank of India and Bank of India have declined between 30-60 percent just in 2019. Other losers include Syndicate Bank, J&K Bank, Punjab National Bank, Canara Bank and Bank of Baroda, which have dipped between 15-25 percent in this time.
However, State Bank of India (SBI) has been an exception, gaining around 12 percent in 2019. SBI, which was trading around Rs 295 at the beginning of the year is now at Rs 335 per share, up 45 percent. The bank hit its all-time high level of Rs 373.70 on July 18, 2019, and a 52-week low of Rs 244.35 on October 9, 2019.
For Q2, the bank reported a net profit for the September quarter to Rs 3,011.73 crore. The lender had posted a profit of Rs 944.87 crore in the same quarter last year. However, recently, Reserve Bank of India found that SBI has under-reported bad loans by Rs 11,932 crore in the year ended 31 March 2019.
The bank had reported Rs 65,895 crore net NPAs during the year, while the RBI assessed it at Rs 77,827 crore, leaving a gap of Rs 11,932 crore. The divergence in provisioning also increased by Rs 12,036 crore for the fiscal ended March 2019. However, among PSU banks, SBI is the most preferred stock for most analysts.
"SBI’s significantly large and strong liability franchise gives it a strong CoF advantage giving it market-making leadership in certain key product segments in retail and undisputed leadership in the corporate segment. This has driven the strong core earnings," India Nivesh said in a report.
It added that the recent resolution of a large stressed steel asset is finally beginning to set in motion long-awaited recoveries from written-off assets and this should translate the push up the normalised core operating profit assets resulting in a stronger bottom line.
Coupled with an upward bias to SBI’s banking business valuation, the brokerage believes SBI provides strong upside potential.
However, for the overall PSU Bank sector, BOB Capital has a bleak outlook for FY20. It does not expect any material improvement in credit growth for FY20. At the same time, as public sector banks grapple with the mega consolidation exercise, private banks will be able to step in and augment market share, it added.
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