PNB fraud & more: Nifty PSU Bank index set for worst monthly fall in 2 yrs


With shares of public-sector banks continuing to reel under pressure on Wednesday, the Nifty PSU Bank index looks set to post its sharpest monthly fall in two years.
The Nifty PSU Bank index, the largest loser among sectoral indices, was trading 1.9 per cent lower in intra-day deals, falling 18.5 per cent so far in February. It is trading close to its 52-week low of 2,928, touched on October 19 last year. By comparison, the Nifty 50 index has lost 4.3 per cent and the Nifty Private Bank index has shed 5.9 per cent this month.
Earlier, in January 2016, the Nifty PSU Bank index had tanked 20 per cent, as against 4.8 per cent decline in the benchmark index and 6.8 per cent fall in the private bank index, show data from the National Stock Exchange (NSE).
The recent fall has been triggered by the Punjab National Bank fraud, estimated to be worth over Rs 114 billion. The scam at the country’s second-biggest public-sector lender comes amid concerns of rising non-performing assets (NPA) in the banking system and slackening credit growth. That apart, reports of cheating/fraud case at government-run Oriental Bank of Commerce (OBC) also dented sentiment.
“The PSU banking sector is fighting a perception battle. It is the weakest link in the markets right now. The bad news is just not stopping.

As a result, investors are moving to safer places within the BFSI segment. Some money is now chasing private sector banks and insurance companies,” explains Jagannadham Thunuguntla, senior vice-president and head of research (wealth) at Centrum Broking.
PNB worst hit
Among individual stocks, Punjab National Bank (PNB), Bank of India, Bank of Maharashtra, Corporation Bank, Punjab & Sind Bank and United Bank of India hit their respective 52-week lows on the NSE on Wednesday. The combined market capitalisation of the 21 listed PSU banks had declined by Rs 867 billion to Rs 4,153 billion during the month.
The PNB stock, the largest loser among the PSU banks, has seen its value almost halve to Rs 94 a share from Rs 172 at beginning of the month. The stock is trading near 20-month low at the bourses.
“Given the uncertainty on the potential outcome and the increasing probability of the bank coming under a prompt corrective action (PCA) plan, we maintain reduce rating. In the worst case, the fraud could result in a 23.5 per cent book value write-off. If we factor this in our target price, our fair value estimate would be Rs 73,” wrote Avneesh Sukhija and Karan Gupta of BNP Paribas in a recent note.
Given that the sentiment has turned sour as regards the PSU banks, analysts advise investors to stay away from this space for now and look at their private sector counterparts instead.
“Valuations after the recent correction are at the lower end of the fair-value range. We downgrade PNB to neutral, but retain our buy calls on the other corporate banks under our coverage, including Bank of Baroda, Axis Bank, ICICI Bank and State Bank of India,” says Adarsh Parasrampuria, an analyst tracking the sector at Nomura.
Meanwhile, the Reserve Bank of India (RBI) has unveiled a revised framework for the resolution of stressed assets, scrapped several loan restructuring programmes, asking banks to immediately identify defaults and make disclosures every Friday to the RBI credit registry. PSU banks have also been directed to examine NPA accounts of more than Rs 500 million for possible fraud and report any cases of wilful default to the Central Bureau of Investigation (CBI).
The revised framework, experts say, aims at creating a structure for banks to provide early warning signals for stressed accounts and prompt reporting of default.
CARE Ratings sees this as a positive from a long-term perspective. In the medium term, however, the rating agency warns of a spike in NPA levels over the next couple of