PSU banking stocks may continue to see momentum in the coming days. The fresh impetus is likely from a couple of developments that have happened in the Union Budget. The first is that the government has decided to provide bank re-capitalization of Rs 70,000 crores to the banks. This is a pretty decent sum, but one would have to wait and see, which bank is allotted how much.
RBI may cut interest rates
The second big factor is that the government has decided to continue to move towards consolidating the fiscal deficit, which has been pegged at 3.3 per cent of GDP for 2019-20. What this means is that going forward we might see the RBI slashing interest rates, being content with the consolidation measures being adopted by the government. This is a positive move for banks, particularly the PSU banking stocks, as bond prices could rise. In fact, the pace and size of cut maybe faster and bigger as well. Another 50 basis points cut, cannot be ruled out.
NPAs on the mend
The non performing assets of PSU banks, all of whom are largely corporate lenders may also see a sharp dip. In fact, this year might see tremendous consolidation, which should enable a further upmove in government owned banks.
However, some of the larger PSU banking stocks have already moved higher significantly, and one is not sure, if there is any risk reward ratio that might be left in these stocks. For example, State Bank of India has rallied quite a bit and one is not sure on the further upside.
Select private sector banks also have the potential
It may just be the right time to also place bets on some contrarian stories. For example, Yes Bank has plunged to a 5-year low. The bank's stock is trading at Rs 88, and there could be some value buying that emerges at these levels. The branch has got a solid network, though many anticipate that the quarterly numbers of the bank are set to be poor. Some other private sector banks may also be an interesting bet at this stage. For example, Karnataka Bank offers a dividend yield of near 3.5 per cent, which is not bad. Similarly, buying in smaller quantities the stock of South Indian Bank would also be good.
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