PSB stocks can see rerating on recapitalisation, treasury gains

In a chat with ET Now, Dipen Sheth, Head - Institutional Research, HDFC Securities, list out the factor that can go in PSU banking stocks’ favor going ahead.


ET Now: Does one look at PSU banks right now post the earnings? Which side of the camp you are in?

Dipen Sheth: PSU banks will become enticing someday. They are getting worse and worse every passing day, but at some stage they will offer a tremendous opportunity.

ET Now: At 0.5 times book value, don’t you think they do offer opportunities right now?

Dipen Sheth: Valuation can never be a reason to buy PSU bank or any stock for that matter. You need to find a trigger for that swing around in rating to happen all over again.

That trigger could come in the form of recapitalisation by the government at market price, at a higher premium to market price, and not necessarily be at or around market price.

The trigger could come in the form of changes in the legal structure, which enables them to go out and get the money that is stuck in.

The change could come in the form of just interest rate swings, which give banks treasury profits to book on their SLR investments. Though to my mind, that is not such a great event by itself because it is not a sustainable stream of earnings for them in future. But, it may it will provide them some tailwinds.

The interest rate part is the least important factor that is actually visible. It is going to play out over the next year. Hence, to my mind, that is not quite enough.

The rules of the game for lending by PSU banks have to change substantially. All the damage that has been done through lending is not just PSU banks’ fault. It is just that the system has been horribly managed or mismanaged.

Once, they get even a part of this right, there is a case for making crazy money on PSU counters. In many ways, despite all the criticism that you have against them, they are reasonably-well run organizations; they have a reasonably talented bunch of people. It is just that they have never been empowered enough powers and that they have not had the legal frameworks which could work in their favour.

There has always been pressure on PSU banks to lend where they should not be lending. Once you remove these restrictions, what have you got, you have got the private sector banks.