LIC buys low valued PSB stocks hoping NPAs wont worsen

Life Insurance Corporation ( LIC), India’s insurance behemoth, is typically known for its bold contrarian calls on the equity market. No surprise then that it is now eyeing state-owned banking stocks, which are available at significantly lower valuations, on hopes that the extent of their non-performing loans may not worsen further.

LIC has increased its stake in IDBI, OBC, Syndicate Bank, Bank of India, Bank of Baroda, Allahabad Bank, and Central Bank of India in the range of 1-7 per cent in the March quarter against the preceding quarter. Based on the average share price of these stocks, LIC has invested nearly Rs 2,200 crore. LIC’s asset under management (AUM) in the BSE 200 dropped to $61 billion (Rs 4.07 lakh crore) in the March quarter as against $65 billion a year ago.

Owning to RBI’s policy of Asset Quality Review (AQR), public sector banks’ NPAs jumped sharply in the March quarter, and net slippage reached alarming level. This has led many investors to pare their exposure in PSU banks due to inability to judge the extent of asset write-down in the future. NPAs and restructured loans as a proportion of loans are hovering near double-digit.

Experts reckon that LIC’s investment philosophy of spotting difference between the valuation and prevalent business cycle makes it capable to take bets against the trend. Also, banks will be among direct beneficiaries of improving economy. With several economic indicators such as fuel consumption, power generation and cement volume growth showing gradual recovery, analysts believe earnings of banks are bottomed out and provide an attractive opportunity for a longterm investor to take fresh exposure to PSU banks stocks.