Tag: Kotak Mahindra Bank

The State Bank of India results announcing a reduction in bad loan pile has fuelled the euphoria. But experts say public sector banks are still wobbly despite the outlook as Covid stress has brought renewed challenges for them.

What’s up?

Traders have mounted derivative bets on state-owned banks encouraged by the recent run-up in share prices. The outstanding positions in futures contracts of public sector lenders such as SBI,

Punjab National Bank and Bank of Baroda have shot up, especially after strong March quarter results from SBI last week.

The open interest in Bank of Baroda futures by number of shares is at a lifetime high and in SBI it is at the highest since September 2020. SBI shares touched a lifetime high of Rs 427.70 on February 18 this year are near that mark.

Nifty PSU Bank index gained 2% to close at 2,398.15 on Monday, with Punjab National Bank, Central Bank and Union Bank and SBI gaining 2-5%.

In the ongoing May series, SBI’s shares are up 14.6% while Bank of Baroda’s shares have risen nearly 22%. Punjab National Bank’s shares are up 13.5% during the same period.

The red flags

While the banks have cleaned up their books, mostly on the basis of write-offs, and posting robust numbers they may be staring at a renewed stress.

Banks are facing greater stress in smaller towns, more so the public sector banks as they have a bigger presence there.

The special mention accounts of public sector lenders are increasing, showing a rise in new stress as Covid buffets smaller businesses.

SBI’s SMA accounts where repayments are overdue more than a month totalled Rs 11,500 crore, while Bank of Baroda and Punjab National Bank had also reported build-up of these accounts for the December quarter during in QIP documents.

Credit growth has been falling for the last few years and totalled 5.58% for FY21 as against 6.02% for FY20. This credit growth is mostly cornered by the private banks, with PSBs seeing a sharper fall in credit growth

While PSU banks have reduced their bad loan pile mostly through write-offs, the recovery from such accounts is abysmal at less than 30%. In FY20, about 25% bad loans were written off. SBI wrote off Rs 32,000 crore in FY21, which is 23% of its total bad loans.

Comparison with private lenders

PSU bank shares have mostly been underperformers vis-à-vis their private-sector peers in the past decade because of high nonperforming loans (NPLs) and loss of market share. The superior performance by private sector banks pushed their valuations to record levels.

The Nifty PSU Bank index is down 11.6% in the past three years, while the Nifty Private Bank Index is up 23%. The Nifty index is up 43.1% in the same period.

PSU banks including Bank of India, Punjab National Bank, Bank of Baroda and UCO Bank among others are trading at a Price to Book (P/B) of around 0.55-0.7 times. SBI is trading at P/B ratio of 1.6 times.

In comparison, private lender HDFC Bank is trading at 4.1 times and Kotak Mahindra Bank at 5.5 times.