Market capitalisation of top 20 PSU banks (by advances) at ₹2.5 lakh crore is almost equal to six leading non-banking finance companies — HDFC, Dewan Housing Finance, LIC Housing Finance, GIC Housing Finance, Shriram Transport Finance and Repco Home Finance.
NBFCs still find favour Even as the valuation of public sector banks may have come down to abysmal levels, analysts are not in a hurry to recommend a ‘buy’ as they believe the worst is not yet over. Instead, they prefer NBFCs, which have performed better than the entire public sector banking space in the December 2015 quarter. The superior financial performance of private sector banks is already known to investors.
Net profit of the six NBFCs grew at an average 20 per cent year-on-year in the December 2015 quarter while their aggregate net interest income rose 16.5 per cent.
On the other hand, most public sector banks reported net losses in the quarter or their net profit declined substantially due to higher provisioning requirements following sharp rise in gross non-performing assets while their aggregate net interest income declined 2 per cent.
“Public sector banks witnessed 29.4 per cent increase in gross NPAs. On aggregate level, public sector banks’ gross NPA ratio increased 7.2 per cent v/s 5.6 per cent in 2QFY16 and private sector banks’ gross NPA ratio increased to 2.5 per cent v/s 2.2 per cent in 2QFY16. Provision expenses of public sector bank jumped 93.8 per cent sequentially,” pointed out Asutosh Kumar Mishra, Analyst at Reliance Securities.
On the other hand, gross NPAs of the six NBFCs mentioned above, was stable at an average 1.6 per cent compared to 1.8 per cent in the same quarter last year.
PSU banks to trail Going ahead, the financial performance of NBFCs will continue to outdo PSU banks. They will not only benefit from base rate cuts executed by banks on the one hand but also revival in rural demand besides healthy growth in retail demand. This will take care of higher provisioning arising out of lower bucket recognition of NPAs (from 180 to 150 dpd by March 2016). Axis Capital’s best picks are Cholamandalam Finance and LIC Housing Finance.
Daljeet Kohli, Head of Research at IndiaNivesh Securities believes the worst is not over PSU banks. “Most of the PSU banks are yet to recognise significant amounts of AQR (asset quality review of the RBI) slippages in Q4FY16 (based on management commentary of most PSBs). Even ex-AQR, slippages continues to remain higher, which is indicative of pain yet not over. Assets which were restructured based on principal moratorium or interest moratorium or both in the last three to four years are turning bad (average range of slippage from restructured book in the last few quarters at 15-25 per cent,” he said.
According to Kohli, SBI, State Bank of Mysore, State Bank of Travancore, Bank of Baroda, Indian Bank, Canara Bank, IDBI Bank and Union Bank are better of the lot while the rest are ‘complete avoids’.