Time To Strike Gold With The Indian Public-Sector Banks

by: StreetFighter


Indian economy growing at an impressive +7 percent.

Public-sector banks trading approximately 40% below their 52-week high.

Public-sector banks will be the prime beneficiary of the growing economy.

India now happens to be the fastest-growing large emerging market with a positive economic outlook; as indicated by the IMF, the economy is expected to grow at an impressive +7 percent for F2016 and F2017. We note that a number of key items such as labor market reforms, GST continue to face opposition, progress has been made on several key reforms since Prime Minister Modi took office. The economy is has benefited from the low oil prices (crude oil is one of Indian largest imports), strengthening domestic demand, and rising foreign investments.

State Bank of India (OTC:SBKJY), Bank of Baroda (OTC:BBKQY), Punjab National Bank (OTC:PNJZY), are amongst the largest bank in India, in terms of assets, loans/advances and deposits, with levels which are significantly higher than their closest competitor. The business position for these banks is reflective of their undisputed market leadership which is supported by a strong domestic franchise and high customer confidence in the public-sector banks. These banks have an extensive branch network well distributed across India, and have a presence in major global financial centers across the world. Their presence in remote areas where in some, they are the sole bank, enables them to maintain a strong core retail deposit base and a high proportion of CASA deposits, driving their liquidity position and reducing reliance (if any) on wholesale funding. The bank cannot be placed in liquidation except by order of the state; in return for this relationship, the banks are rewarded in terms of periodic capital infusions and government business. The strong brand recognition of these banks enables them to raise deposits internationally from the Indian diaspora to fund foreign operations.

We note that public-sector banks are currently facing issues with asset quality, earning and capital, following the Reserve Bank of India's stringent directives regarding recognition of bad loans and increased provisions; however the strength of the banks remains acceptable. It's important to keep in mind that the banks have an almost certain likelihood of receiving support from the government in the case a need arises. A majority of the impaired assets comprises of priority sector loans (such as Agricultural, Infrastructure, etcetera), which is mandated by the government; in return for this, these banks are rewarded by business and support from the government. Although State Bank of India is the only public-sector bank that has been classified as a Domestic -Systemically Important Bank by the Reserve Bank of India, we believe all of the three banks under consideration have an almost certain likelihood of receiving support in light of their majority government ownership, and high market share of system loans and deposits.

The government intends to inject $10.5BN in capital into the state-owned banks between F2016 - F2019, of which $7.5BN has been earmarked to be injected over the first two years. This is expected to enable banks in meet Basel III capital requirements, as well as pursuing growth opportunities, albeit with a conservative risk appetite. Although the banks under consideration banks have reported a decline in profitability/ losses for the last nine-months ending Dec 2015, we note that top line income, i.e. net interest income and fees & commission income, has increased and the reported decline in net income is due to the banks shoring up provisions for bad loans as directed by the central bank. With the banks proactively recognizing non-performing loan and shoring up provisions, we will not be surprised if the Indian government expedites the capital infusion for the public-sector banks.

In terms of equity prices, the public-sector banks are presently trading approximately 40% lower than the 52-week high; which makes it a good entry point. I believe these stocks offer good upside in the short-to-medium term, and have moderate risk-profile. The stocks are not recommended for investor looking for yield. Happy investing!

References: Investor Relations - State Bank of India, Bank of Baroda, Punjab National Bank

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.