Banking stocks: Sector on the mend, opens up opportunity for investors

Banking stocks: Sector on the mend, opens up opportunity for investors

Recent steps by the RBI and Centre to improve the fiscal health of lenders have lifted market sentiments. The move could bring in long-term gains for investors

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The decisions of the RBI and the Centre have led to a sharp rise in share price of public sector banks. Over the last three trading sessions while the Sensex at the Bombay Stock Exchange has gone up by 0.5 per cent, the PSU Bank ETF has seen a 7.2 per cent jump in its net asset value

This week, two major decisions, one each by the Reserve Bank of India and the Central government lifted the investor sentiment around public sector banks that have been under stress for some time now. While several state-owned banks announced big losses and a spike in their non-performing assets in the quarters ended December 2015 and March 2016 and their share prices had hit 52-week lows in February, experts say that the decisions by the regulator and the government displays their resolve and determination to bring the banks back on track.

There is a sense in the market that along with restoring investor confidence in PSBs, the move may also create long-term gains for investors who may invest in the banks to take advantage of the ruling low valuations and potential gains from policy decisions.


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RBI’s Scheme for Sustainable Structuring of Stressed Assets (S4A) is being seen by many as a much better plan to bring stressed companies back on track and also improve the health of the public sector lenders. Centre’s decision to merge subsidiaries of State Bank of India with the parent is also seen as a proof of the government’s resolve to consolidate public sector banks and have few large banks.

Read: RBI’s new NPA scheme has limited applicability, say experts


The decisions have led to a sharp rise in share price of public sector banks. Over the last three trading sessions, while the Sensex at the Bombay Stock Exchange has gone up only by 0.5 per cent, the PSU Bank ETF has seen a 7.2 per cent jump in its net asset value.

“While talks of merger of SBI and its subsidiaries has been going on for a long time now, the government’s decision on Wednesday reveals their determination to move forward and fix things one by one.

I think that the next move will be to consolidate the remaining public sector banks,” said Raamdeo Agrawal, joint MD, Motilal Oswal Financial Services.

The two major decisions

On Wednesday, in its first move to consolidate the country’s struggling public sector banks, the Union Cabinet approved the merger of State Bank of India (SBI) and its five associate banks. Once the merger gets completed, the entity will have an asset base of Rs 37,00,000 crore, 22,500 branches and 58,000 ATMs. This announcement comes two years after State Bank of Indore was merged with SBI and eight years after State Bank of Saurashtra was merged with the parent.

SBI chairman Arundhati Bhattacharya welcomed the decision and pointing the benefits of the merger, said, “One can expect efficiencies to be created from rationalisation of branches, common treasury pooling and proper deployment of a large skilled resource base … Any introduction of new technology by SBI would simultaneously be available uniformly. The scale of operations and common cost would get rationalised. Overall, the synergies being pooled at one place are going to be a big positive.”

Earlier, on Monday, the Reserve Bank of India announced the S4A scheme for “reworking the financial structure” of big corporate entities “facing genuine difficulties”. The scheme calls for splitting the loans of stressed entities into two — Part A on which the borrower can pay interest and Part B which will get converted into equity/redeemable cumulative optionally convertible preference shares. In June 2015, RBI had announced a strategic debt restructuring (SDR) scheme within which a consortium of lenders convert part of their loan in the debt ridden company, into equity and the consortium would own at least 51 per cent stake in the company. Till January 2016, only in around 16 cases the banks turned into majority owners and gained management control in order to recover their loans worth over Rs 81,000 crore.

As concerns were raised on the banks ability to run a company and therefore on the success of the SDR scheme, market experts see the new scheme to be a better one. “The new scheme charts out a middle path where banks will work with the existing management and it could be mutually beneficial to both the bank and the promoter of the troubled entity,” said Pankaj Pandey, head of research at ICICI Securities.

Read: RBI unveils new scheme to tackle bad loans of big firms

A recently released report by Bank of America Merrill Lynch says that the RBI scheme will have a positive impact on the banks in the longer run and said that it is a better scheme than the SDR scheme. “Banks, in our view, are already carrying provisions in excess of the minimum15-25 per cent required in first non-performing loan (NPL) bucket. This would likely be the case for most new NPLs under S4A scheme, as they were classified in ‘D1’ or ‘D2’ category and were considered NPLs from the original date of restructuring. Larger banks, in our view, will benefit the most given the size of their NPLs. We also believe this a better scheme than the SDR given that the entire corporate debt need not be classified as NPL and existing promoters can continue,” said the BofAML report. In 2014, the RBI had also come out with a 5:25 scheme that allowed banks to extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every 5 or 7 years.

Will it change the state of PSBs?

There is a growing feeling in the market that after the announcement of merger of SBI associates with the parent, the government will look for further consolidation and merge other PSBs. If hopes of the same has led to a rally in the share price of state-owned lenders other than that of the SBI and its subsidiaries, experts feel that while directionally the government’s moves are steps in the right direction, there is a still a long way to go before the banks can emerge out fully of their ongoing NPA crisis.

“While there is a euphoria in the market, I don’t see anything changing for the banks in the immediate future. Not only they continue to be saddled with the NPA issue, the credit growth in the economy is also missing,” said the chief investment officer of a leading mutual fund.


Agrawal said that while there is still a long way to go for the complete revival of banks, the fact that RBI and government are addressing the concerns, gives the confidence that the issues are getting the desired attention.