For the past couple of years, public sector banks (PSBs) asset quality and capital adequacy were key considerations driving bank stocks. Aggregate gross and net NPL of eight PSBs under our coverage have jumped from 2.4/1.2% in FY11 to 4.3/2.4% in FY14.
The sharp deterioration in PSBs' asset quality (along with high opex & MTM hit) has impacted both margin and return ratios, which now stand at nearly decade low levels. Capital positions are no better.
"In our view, asset quality pain is expected to recede in the coming quarters led by gradual improvement in the economy, deleveraging by large corporates and softening of interest rates," said HDFC Securities.
Further, the RBI's accommodative measures viz, postponing Basel III implementation by a year, easing debt capital raising (AT I and Tier II) norms and buoyant capital markets have lowered dilution risk for many PSBs like Union Bank of India, Allahabad Bank, Bank of India and CBK, it said.
"Thus, we believe it now makes sense to focus on NIM and growth dynamics of PSBs. In this note, we identify the PSBs that have the ability to report NIM improvement and/or gain market-share by fine-tuning their respective NIMs and growth paths," HDFC Securities added.
"Within mid-tier PSBs, we find Union Bank of India and Oriental Bank of Commerce better placed for a NIM uptick given their cautious growth approach. Amongst large PSBs, we feel SBI and Punjab National Bank are poised for NIM improvement driven by higher growth (supported by CRAR and deposit franchise). We remain skeptical on Bank of India and CBK given their high growth strategy despite weak deposit profile and capital position," it opined.
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