Only few public sector banks worth investing in

A mid-sized firm has a whopping debt of over Rs. 3,000 crore with a turnover of less than Rs. 500 crore, but it has to recover close to Rs. 4000 crore from its customers. An infrastructure firm has a debt of over Rs. 60,000 crore, which is three times its current revenues. While a mid-sized manufacturing firm had borrowed close to Rs. 2,000 crore mainly from the PSU banks, the assets of this firm were put on auction by the banks for a maximum bid amount of less than Rs.200 crore. The PSU banks are the major lenders to all these firms.

While many mid-sized companies have serious governance issues, many infra companies have become victim of severe slowdown in the industrial economy. Consequently, the stress got accumulated for the PSU banks. For the first time in more than a decade, four out of over 20 listed PSU banks have posted losses in the latest quarter. These banks account for about 12% of total banking industry’s credit base. Almost half of the remaining PSU banks have posted strong year-on-year de-growth in net profits in the last fiscal.

Ever since the central bank has released its monetary policy, many rate-sensitive stocks have fallen as much as 30% as the market has perceived that further rate cut is most unlikely in this year. Most of these leveraged companies’ stocks have fallen over 50% to 70% in the last one year. A lot of these companies have pledged the shares of the promoters to the state-owned lenders. Hence, any further continuous fall in their stock prices could hit weak PSU banks badly as further erosion in the stock prices could trigger forced selling of stocks in the markets at much lower prices due to margin pressures.

Time has come for the Reserve Bank of India to cut the rates aggressively to help infra sector and for the government to chase and recover liabilities from the unscrupulous promoters. Otherwise, some of the weak PSU banks, which lent to the “sick” firms, would themselves become perennially sick.

While some of the large PSU banks are available at steep discount to adjusted book value, a couple of weak PSU banks are still trading at as high as 80% premium to their adjusted book value – the reason for such high premium being the very low floating stock on the markets. Hence, for the retail investors, the options are actually limited only to a handful of PSU banking stocks, which have net non performing assets of less than 2%, still keep growing their lending in double digits and also available close to adjusted book value.


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