Are they ripe for a re-rating in the markets?
As the results season reaches its halfway mark, there have been the standard hits and misses. Pharma has disappointed and so has capital goods. But banking and auto have not exactly fared badly. Capital goods and IT may have pockets of concern. But the moral of the story is that India is emerging as a market of very stock-specific plays. It is within this story that select PSU banks are beginning to attract renewed interest from investors. But why!
The rate cut hope…
Of course, we did write last week that a rate cut is unlikely by the RBI as it would prefer to wait out the Fed decision. Post the July meet of the Federal Reserve, there is some hope for the rate-cut camp. The Fed has underlined that even after the data justifies a rate hike, the Fed may not be in a hurry. Rather, they would prefer to wait and reassure themselves that the data is sustainable. This has given room for hope that the Fed may postpone the rate hike from September to December.
Attacking the NPA problem…
Nobody is denying the NPA problem. The good news is that there is an earnest attempt by the government of the day to take the bull by the horns. A series of steps like a better recovery mechanism, an enabling legal environment and create the environment for ARCs has helped. At least the NPA problem is being attacked in right earnest and that is good news for PSU banks. The recent amendments permitting banks to take over the management of a defaulting company will act as a deterrent for willful defaulters. That is good enough!
Much needed capital…
The government has already announced the first tranche of re-capitalization for PSU banks worth Rs.12,000 crore. This will give the PSU banks the much needed leeway to expand their asset base. This will address the problem of NPAs and profitability.
Turning the corner, finally?
While it may be too early for the bugles and trumpets, the PSU banks may be finally seeing the much-needed turnaround. A combination of easy rates, NPA management and capital infusion is what they required. It may not help the cause of all PSU banks but will separate the wheat from the chaff.
There may not an all-out re-rating of PSU banks. But those PSU banks that leverage on technology, manage costs better, use an early warning system for NPAs and are able to raise capital will outperform from these levels. For the banks it will be the much needed breathing space. For investors, it will be the return of a sector, which was once the darling of Indian investors. ©
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