PSU Banking stocks are trading significantly lower then they were a year back. Along with the metals pack, they have been one of the worst performing stocks this year.

However, if you are willing to buy and hold these stocks for the next two years, you could well reap the rewards. Under the circumstances, you have to take a contrarian view and buy these stocks.

Drop in repo rates to benefit the banks

While, the Reserve Bank of India has dropped repo rates by a huge 1.25 per cent this year, banks have passed on, only a part of this. What this means that it could help improve margins of banks, as they have not passed on the entire benefits.

There is a further possibility of interest rates cut going forward. Inflation has been trending lower and WPI inflation is in the negative terrain, with some even calling the price trend very deflationary. It is therefore likely that there could be further rate cuts, which could boost the prices of government owned banks.

Economic recovery gathering pace

If tax collection data and IIP data is carefully analyzed, it clearly points to a pick up in demand. If economic recovery gathers pace, it could benefits the banking sector. Non performing assets could fall and this would be one of the biggest triggers for stocks of this sector.

Bad debt recovery gathering steal

Several banks have now been focusing on recovery of loans and this has been richly paying off. As we write a report in the Economic Times suggest the improving trend of recovery at Bank of India. If this continues we could see the non performing assets reduce and share price rocketing.

Fundamentally undervalued

But, one of the main reasons to be buying PSU banking shares is the grossly undervalued share prices. Some banks like Syndicate Bank are traded at barely 6 times price to earnings multiples, while the price to book value for most PSU banks is under 0.50 times.

Most of the damage to the stock prices in these banks have been done. A lot of these banks are at least 40-50 per cent lower in terms of prices that were prevailing a year back. This makes them attractive picks at the current levels.

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