Demonetisation impact: PSU bank shares outperform private peers

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Mumbai: Shares of most state-owned banks have rallied since demonetisation on the back of swelling deposits and falling treasury yields, and are surprisingly turning out to be better performers than their private-sector counterparts, even as the problem of bad loans continues to weigh.

In a surprise move to curb black money, terrorism finance and fake notes, the government on 8 November banned Rs500 and Rs1,000 currency notes.

The BSE’s benchmark 30-share Sensex has lost nearly 4% since the start of demonetisation, while the Bankex has lost 6%. A Mint analysis of 25 listed state-run banks showed that 15 of these banking stocks gained during the period, while nine declined. On the other hand, all 16 private banks have traded lower since then.

“They (state-run banks) are benefitting on the deposits end, because of their larger share in branch network. That has aided the performance for these banks,” said Nitin Aggarwal, vice president, research at Antique Stock Broking Ltd.

The banking system received deposits worth Rs12.4 trillion in the month till 10 December, after the government invalidated high-value currency notes.

According to data released by the RBI, Rs14.2 trillion worth currency notes inf Rs 500 and Rs1,000 denominations were in circulation as on 31 March.“Their (state-run banks’) sensitivity to falling bond yields is higher,” said Aggarwal, pointing out that roughly, for every 50 basis-point decline in the 10-year bond yields, their average operating profit will increase by around 7%.

Benchmark 10-year government bonds have had a good run, with yields currently at 6.506%, down from 6.798% on 8 November. Year to date, the yield for this benchmark bond is down 125.5 basis points. One basis point is one-hundredth of a percentage point.

“Private banks are not as sensitive to this, as their fee incomes and margins are higher,” said Aggarwal.

Foreign institutional investors (FIIs) have sold a net of $2.8 billion in equities since 8 November, pushing many bank shares lower. “Most selling is happening by FIIs, and the holding of FIIs in private banks, is much higher than that in PSU Banks,” said an analyst with Reliance Securities, explaining why shares of state-owned banks have been relatively resilient.

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As of 30 September, FIIs held a total of 36.3% stake in listed private banks, while they held a mere 7.65% stake in listed state-run banks, data from Capitaline showed. State-run banks have otherwise been off the radar of foreign investors because of issues including rising non-performing assets. Of the 25 public banks, 19 had gross NPAs (non performing assets) between 10% and 21.77% of their respective loan books, at the end of the September quarter.

Shares of most state-owned banks have rallied since demonetisation on the back of swelling deposits and falling treasury yields, and are surprisingly turning out to be better performers than their private-sector counterparts, even as the problem of bad loans continues to weigh.

In a surprise move to curb black money, terrorism finance and fake notes, the government on 8 November banned Rs500 and Rs1,000 currency notes.

The BSE’s benchmark 30-share Sensex has lost nearly 4% since the start of demonetisation, while the Bankex has lost 6%. A Mint analysis of 25 listed state-run banks showed that 15 of these banking stocks gained during the period, while nine declined. On the other hand, all 16 private banks have traded lower since then.

More news on demonetisation

“They (state-run banks) are benefitting on the deposits end, because of their larger share in branch network. That has aided the performance for these banks,” said Nitin Aggarwal, vice president, research at Antique Stock Broking Ltd.

The banking system received deposits worth Rs12.4 trillion in the month till 10 December, after the government invalidated high-value currency notes.

According to data released by the RBI, Rs14.2 trillion worth currency notes inf Rs 500 and Rs1,000 denominations were in circulation as on 31 March.“Their (state-run banks’) sensitivity to falling bond yields is higher,” said Aggarwal, pointing out that roughly, for every 50 basis-point decline in the 10-year bond yields, their average operating profit will increase by around 7%.

Benchmark 10-year government bonds have had a good run, with yields currently at 6.506%, down from 6.798% on 8 November. Year to date, the yield for this benchmark bond is down 125.5 basis points. One basis point is one-hundredth of a percentage point.

“Private banks are not as sensitive to this, as their fee incomes and margins are higher,” said Aggarwal.

ALSO READ | New note ban and cash withdrawal rules as of 16 December

Foreign institutional investors (FIIs) have sold a net of $2.8 billion in equities since 8 November, pushing many bank shares lower. “Most selling is happening by FIIs, and the holding of FIIs in private banks, is much higher than that in PSU Banks,” said an analyst with Reliance Securities, explaining why shares of state-owned banks have been relatively resilient.

As of 30 September, FIIs held a total of 36.3% stake in listed private banks, while they held a mere 7.65% stake in listed state-run banks, data from Capitaline showed. State-run banks have otherwise been off the radar of foreign investors because of issues including rising non-performing assets. Of the 25 public banks, 19 had gross NPAs (non performing assets) between 10% and 21.77% of their respective loan books, at the end of the September quarter.

Indian Overseas Bank topped the list (21.77%), followed by Uco Bank (16.51%), United Bank of India (16.26%), Bank of Maharashtra (14.08%) and Dena Bank (13.79%). Two large public sector banks—Punjab National Bank and Bank of India—had more than 13% gross NPAs.

Among private sector banks, ICICI Bank Ltd has the maximum gross NPAs—6.28% of the loan book, followed by Axis Bank Ltd (4.17%). To be sure, Dhanlaxmi Bank Ltd has even more NPAs than ICICI Bank but is comparatively smaller.