At 02:05 pm; Nifty PSU Bank, the largest gainer among sectoral indices, was up 0.55% at 2,927, bouncing back 3% from its intra-day low. The index was down 2% at 2,846 in early morning deal after a media report suggested that Punjab National Bank (PNB) told police that it has uncovered additional exposure of about Rs 9.42 billion in connection with a massive alleged fraud.
“The amounts of Rs 9.42 billion were the regular limits sanctioned to Geetanjali Group under consortium lending, and were standard credit exposure at the time of detection of the fraud. Now, this exposure is being added to the existing fraudulent amount. This amount has nothing to do with any new fraudulent letters of undertaking (LoUs) and letters of comfort (LoCs),” PNB said on a clarification on news
The Reserve Bank of India (RBI) on Tuesday discontinued issuance of LoUs and LoCs for importers with immediate effect, in an attempt to prevent fraud such as the one allegedly carried out by jewellers Nirav Modi and Mehul Choksi. Letters of credit (LCs) and guarantees will continue to be issued like before if they meet certain criteria.
Since January 25 peak, Nifty PSU Bank index have lost 28% as compared to 6% decline in Nifty 50 index till Monday and retraced the entire post-recap gains. This was driven by a confluence of bad news
– a large fraud at PNB, tighter provisioning norms from the RBI and continued pressure from bond yields.
“Within the space, PNB is the least-preferred, given a lack of visibility on capital and losses. We are now agnostic between BOB and State Bank of India (SBI) – SBI has a better deposit profile and fewer challenges on the overseas book but BOB’s provisioning position is better,” analysts at JP Morgan said in recent report on PSU banks.
The key catalysts for the sector are trends in provisioning and cleanup, including outcomes from the insolvency cases under process – ~60% portfolio loss given default (LGD) is in the price; recap allocations towards larger banks is a positive, as would be an expansion of the budgeted Rs 650 billion and any significant movement in bond yields either way from current levels would move the stocks in the same direction, added report.