Banks have been in a position of leadership since Budget Day and perhaps even before that. As the economy begins to recover, we see that the banks are economically critical in terms of their performance, they have been doing very well and some of the uncertainties surrounding their NPAs and debt costs have been greatly resolved.
Yesterday’s announcement was just a small thing that has allowed the bank’s shares to come back to light again. It does not make such a big difference in the profitability of banks. It really opens up a whole new way to get more business, especially a profitable business from the government, but it will increase.
At the end of the day, the main issue in the banks is that the NPAs are lower and therefore lower credit costs and higher interest rates as the economy and debt growth begin. Those are the two foundations on which the bank’s shares are gathered.
Given the comments from the Minister of Finance and the Prime Minister himself yesterday that they are very committed to the investment process and that the government has no business to do with business, should PSU now be considered an investment prospect?
While these are good words and music to the ears of many, we need to take them with a little salt. I don’t think the government is looking to make PSU banks do their rights privately, even if smaller ones are allowed. They are not looking to make four or five major banks in cash and those banks will remain under the public sector.
Having said that, we are very confident about PSU banks. You can see a very powerful trading session. Already one is going on, but this has many wings and can fly very high. The reason for this is that the whole NPA problem has been resolved at the PSU bank and the economy is in good shape and they have improved their lending rates.
It is unlikely that the next year or two will see high debt costs. Just because of the very low cost of debt, the profit for the next financial year will look very impressive. These stocks will look cheaper compared to what they are now. They are selling at a price of 0.6 times the reservation price and in the middle of the single digit price is more than the profit margins. With their ever-increasing profits, these ratings will be stressful. Keeping that in mind, one can expect a very good return from PSU banks in the next six to 12 months anyway.
There is no doubt that two, three years later, they may get into another problem, but in the next few years, PSU banks look very good and investors should consider investing a portion of their portfolio in PSU banks, perhaps even hurting others in private companies. I feel that in the next few months and institutions, PSU banks could outperform private sector banks in price movements.