The sharp rally in domestic stock markets over the last three months since Budget has resulted in higher valuations. The Nifty is trading at over 17 times its FY2017 estimated earnings and most companies with earnings visibility and growth are fully priced, say analysts.
According to UR Bhat of Dalton Capital, public sector banks could be a good investment opportunity if government and Reserve Bank take the right steps to address the issues dogging state-run lenders.
“The big absolute type of opportunity that would be there is probably the PSU banks because this is one category, which has been hammered,” Mr Bhat told NDTV Profit.
In last one year, National Stock Exchange’s sub-index for PSU banks has corrected over 33 per cent compared to 2 per cent fall in the broader Nifty.
The sharp selloff in PSU banks was triggered by rising non-performing loans, which rose following an RBI mandated asset quality review. State-owned bank’s provisioning towards these non-performing loans increased multi-fold over the last two quarters resulting in record losses.
During the last one year to March 31, 2016, combined bad loans at 26 state-owned banks has increased by nearly Rs 2.6 lakh crore to Rs 5.4 lakh crore.
Mr Bhat said PSU banks could be a good value investment bet if the NPA (non-performing assets) issue is addressed properly. “One sort of a solution needs to be articulated with the government or the RBI and then only they (PSU banks) become reasonably good buy,” he said.
Although Mr Bhat ruled out merger of smaller state-owned banks as a possible solution to the bad loan woes, he said creation of a “Bad Bank” could address the NPA problem.
If the government takes out all the bad loans of PSU banks and creates a separate “Bad Bank”, which is recapitalised and run as a separate entity, then PSU banks will start with a clean slate and their profit will grow gradually, said Mr Bhat.
Public sector banks are unlikely to report profit for next three years, unless the governm