PSU Banking Stocks: Will The Glory Days Be Back?

Last year when the government announced the recapitalization of government banks, shares of government banks scaled dizzy heights. In fact, PNB shares surged to a high of Rs 231 (current market price Rs 79), Bank of Baroda scaled to Rs 206 (current market price Rs 211), Canara Bank hit Rs 463 (current market price Rs 248) and so on.

The capitalization story is over and hardly has it mattered to these banks. Some have received very paltry sums, which are almost insignificant, while others have not.

A few quarters ago, most analysts had predicted that the gross NPAs of government owned banks was peaking. Many bought into that story, only to realize that the NPAs had gotten worse.

A ray of hope for the banking sector is followed by a long period of exasperation for shareholders of government owned banking stocks.

Huge losses for PSU banking stocks on Tuesday

The shares of Bank of Baroda plummeted a huge 17 per cent on Tuesday, as the government decided to merge Bank of Baroda, Dena Bank and Vijaya Bank. The problem is that Bank of Baroda after the merger will have to bear the brunt of a huge level of non performing assets of Dena Bank.

Share holders in Bank of Baroda saw their wealth eroding by 17 per cent in a single day. Obviously, Bank of Baroda is facing a downgrade from a number of brokerages who feel that the merger will face integration issues and will have higher non-performing loans post-merger, thanks to NPAs of Dena Bank.

Bank of Baroda was a bank that was rather well-off, will now have to see its applecart upset. For government banking stocks on Tuesday it was a disaster on worries that bigger banks may have to takeover the smaller weaker banks. Stocks like Union Bank fell 10 per cent in trade and Canara Bank crashed 5 per cent.

Starved of capital

Some of the government owned banks are also starved of capital. In the case of Bank of Baroda, Dena Bank and Vijaya Bank merger Alka Anbarasu, VP, financial institutions group, Moody's Investors Service said "We expect the merged entity will require capital support from the government, otherwise such a merger would not improve their capitalisation profile."

One is not sure from where and how the capital will come with just 8 months for the elections. Also, if there is a hung verdict in 2019, one can never be sure what reforms would be initiated and if any bold reforms would be initiated at all.

At the moment it seems frightening to try and buy banking stocks. Probably, you can be a little more enterprising, when you see light at the end of the tunnel. At the moment that light is absent.