During the quarter ended September, foreign institutional investors (FIIs) cut stakes in front-line public sector banks (PSBs) such as State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank and Bank of India, shareholding data show.
This was the third consecutive quarter when foreign investors reduced exposures to PSBs.
So far, 12 PSBs have disclosed their September quarter shareholding data. These show FIIs’ stake in nine banks declined by up to two percentage points. While their stake in Central Bank of India remained unchanged, they increased their stake in Dena Bank and IDBI Bank.
In SBI, FIIs’ stake declined by 1.17 percentage points to 10.37 per cent in the September quarter from 11.54 per cent in the previous one. At the end of the March quarter and the December 2014 quarter, their stake stood at 11.72 per cent and 11.95 per cent, respectively.
In BoB, the stake held by FIIs fell by 1.5 percentage points to 12.04 per cent in the September quarter. At the end of the December 2014 quarter, the stake was 17.96 per cent.
Mayuresh Joshi, fund manager (portfolio management services), Angel Broking, says: “What happened in the September quarter has a lot to do with the earnings visibility of a lot of these banks. If we compare the PSBs with private sector banks, the investment argument still favours private banks, in terms of earnings visibility, asset quality and capital adequacy. While the asset quality might remain stable for banks, their exposure to the steel, infrastructure, metals, gems and jewellery and real estate sectors is a concern, as these have to come out of their structural downturn.
“Given this, the earnings might not improve drastically. Private banks offer some comfort on the three parameters of earnings visibility, asset quality and capital adequacy. We cannot generalise whether FIIs will pare stake in the banking sector as a whole, but it is a stock/company-specific aspect. If PSBs are able to report stable numbers through the next few quarters, one could expect a re-rating in these counters,” he adds.
Rapid sell-off by FIIs in PSBs saw the CNX PSU Bank index, a gauge of PSBs, decline 25 per cent this year, against the Nifty’s one per cent fall.
Asutosh Kumar Mishra of Reliance Securities expects PSB stocks to consolidate in the near term. He says SBI, Canara Bank, and Indian Bank are better placed to take advantage of the current situation.
“Valuation multiples of PSBs are still far below their historical average. This is primarily due to the higher degree of uncertainty on their asset quality and operating performance, which will continue to linger despite the implementation of project Indradhanush. Latest reform measures are aimed to address the key structural problems faced by PSBs but the effects will not be felt soon; these might show positive signs through the next two years. Meanwhile, return ratios and asset quality of PSBs will remain under stress for the next few quarters,” he says.
Aalok Shah, an analyst with Centrum Broking, says he prefers well-capitalised and/or operationally improving banks such as Axis Bank, ICICI Bank and SBI. “In the mid-cap space, we remain positive on J&K Bank. In the context of stable earnings, we believe valuations for City Union Bank and DCB Bank appear stretched. Therefore, we retain a hold rating on these stocks,” he says.