Not the right time to buy Public Sector Bank stocks

As the share prices of many Public Sector Banks (PSBs) seem cheap, should one be tempted to buy them? The answer is “no”, caution a few analysts. They explain that a share can actually be called ‘cheap’ when its prices are down but the net-worth of the company is still intact or the company has a good future earning potential. Many PSBs currently fail on both these counts. The actual net worth of many smaller PSBs is in serious doubt. Not only the share prices but the net worth of many PSBs is sliding fast. Sliding net worth, coupled with the poor credit growth scenario, limits the future earning potential of almost all PSBs. The speed with which banking frauds are coming out, “many PSBs might have reached zero or negative net worth (bankrupt) by now”, says a Delhi-based auditor.

“It is advisable, therefore, to wait for some more clarity to come before one actually buys PSBs’ stocks. One still doesn’t know the extent of damage and also whether similar frauds had also taken place in other public sector banks or not,” adds the auditor. Experts say that many investors do not trust the current balance sheets of many PSBs. Fraud committed at PNB has engulfed about 40 per cent of its market capitalisation which categorically indicates the weakness of its balance sheet. The fact that a single branch committing a fraud could jeopardise the existence of the bank itself shows how poorly the bank is capitalised. The can of worms is being opened now which in due course would tell us about the quantum of fraud(s) and its impact on PSBs’ balance sheets. One should also wait for March quarter results of PSBs. These results would give investors a chance to peep into additional provisioning done by PSBs to cover their Non-Performing Assets (NPAs).

Although every NPA is not fraud, every fraud leads to an NPA. The government’s humongous re-capitalisation plan of about Rs 2.11 lakh crore in itself is an acknowledgement that the NPA problem is dead serious. Of the total NPAs of over Rs 11 lakh crore, only 25 per cent is perceived to be genuine where global recession has indeed incapacitated the borrower’s ability to pay back, the rest 75 per cent of NPAs has different shades of grey. It is feared that the zeal with which investigative agencies are probing the PNB fraud might create chaos wherein the trust among the promoter, banker and the investigative agencies would break down. If it does break down, then everyone would try to save his skin. The government’s recent order requiring every PSB to get every NPA (of Rs 50 crore and above) screened for possible fraud might lead to such breakdown. Many feel that this order would be used as an escape (safe exit) route by PSB executives who would prefer to classify such NPAs as frauds to save themselves from probable actions by the agencies.

With more and more cases classified as frauds, banks have to do more provisioning to cover such NPAs which would weaken their balance sheets further. As banks and government (as its largest shareholder) are now busy putting preventive checks and balances, giving new credit will not be their top priority now. This means that investible opportunities would squeeze down further impacting the credit growth which is already at its lowest level (to the industrial sector). All of this would surely impact economic growth. Crisil in its recent report titled ‘The FouRs of Growth’ says that India’s growth dynamics next fiscal and beyond depends on four thrust vectors of which the resolution of banking sector stress (NPAs) tops the list followed by rural rejuvenation, relentless implementation of reforms and rising global growth. The reports adds that the asset quality issues plaguing the public sector banks have reached such gargantuan proportions—with gross non-performing assets touching 10.5 per cent—that no meaningful and sustainable economic recovery is plausible without, at least, the beginning of a resolution process. Gross NPAs are expected to continue their ascent next fiscal, before starting to retract.

RBI’s advisory—issued in 2016—to every bank obligating them to reconcile SWIFT messaging with their core banking system has not been honored by every PSB. Such linking would have helped detect the fraud that happened in PNB. As banks were complacent, the NPAs kept on rising. The NPA figures quoted in the case of Rotomac or Simbhaoli Suger Mills have not been given to these companies overnight. It is an accumulated bank credit given to them over a long period of time. The accumulation of such colossal amount of credit (above Rs 4,000 crore in each case) must have been allowed on the basis of long and good banking relationship. This means that both the bank and the promoter had a good understanding wherein the borrower was paying back some (for example, 20 paisa out of every one rupee borrowed) to keep his account running but was also diverting a good portion of the borrowed money for other purposes. Such diversion was happening with the knowledge of the banks if not with their connivance. This has created complacency and had also spread the overall culture of corruption in the banking space.

The new Fugitive Economic Offender’s Bill is a part of banking reforms which would play an important role in deterring economic offenders. Such measures would restore popular faith in the banking system. If India has to go on with more public sector banks playing a major role in the economy, then such legislations are necessary to keep the faith of investors intact. At this juncture the government might not privatise PSBs but may go in for big mergers among PSBs. Clarity on this count is also required before a sound decision to buy PSB stocks is made.