PSU BANKS - NO TO "STOCK" YES TO "FD"
By Ruma Dubey
There were some panic calls in our office today. And all had only one worry, “ Today all PSU banks have crashed, are at new lows. All our life time savings are in PSU banks only. So should be break the FDs?”
And our vehement answer to all was, “NO”. The stock prices have hit new lows on account of poor profitability, mounting bad debts and deteriorating asset quality. Yet, our advice is that one should stay out.
If the same had happened with a company – sinking profits and questionable future; wouldn’t we ask one to just run away without looking back ever!
Therein lay the paradox – for a PSU bank, we are able to say differentiate between the profitability/asset quality and long term survival of the bank. But at the same time, when it comes to a company, the same profitability, will it be reason enough to move out. Why? Because when it comes to PSU banks, the promoter is the Government of India and that in itself is a big guarantee; the Govt will not sink and there is the confidence that if needed, the Govt will step in to rescue.
And it is this confidence in the Govt, which will protect its banks, the very edifice of its existence which makes the PSU FDs even today a good bet. What about stocks? Given the declining profitability of PNB or the losses of Allahabad Bank, Dena Bank or Central Bank of India, does it make them a good buy though… just like their FDs?
There is no doubt right now in anyone’s mind that the fall in asset quality is very scary. 27 PSU banks have written-off Rs.1.14 lakh crore bad loans, from 2012 to 2015. In Fy15 alone, there was a steep 53% jump up in write-off. SBI topped the chart by writing-off Rs.21,313 crore with PNB being the second in tow and third place was Indian Overseas Bank.
The RBI Governor is alarmed and is currently working on mechanisms to help bank clean-up the balance sheets before 31st March 2017 – the deadline issued by Rajan for banks to clean-up.
There is enough capital available for the banks. We are sure to see an erosion in profits and this is mainly on account of the clean-up – higher provisioning has dented many a bottomlines. Thus in the short run we are sure to see more pain, more fall in profits and asset quality but once it is all cleaned up, things are sure to turnaround for the PSU banks.
The Govt has already announced a financial support for the banks through its capital infusion program ‘Indradhanush’ – to inject Rs.70,000 crore over the next four years in PSU banks. Of this, Rs.25,000 crore will come in current fiscal – Rs.20,088 crore has already been infused in 13 PSU banks and in FY17 with Rs.10,000 crore to come in FY18 and FY19 each.
So yes, things do not look good today for PSU banks as all the grit, grime and slime during the clean-up has floated up. But it will not always be like this. We could see this pain over the next quarter or two. Wait for Q4 before getting into any PSU bank as a stock. And FDs? Nothing could be safer!