Riding high on recap hopes, Nifty PSU Bank Index gains

The Nifty PSU Bank index rose 3.49% and ended the session at 3,965.60 ahead of the Centre’s bank recapitalisation announcement on Wednesday. All the 12 constituents of the index closed with gains. The index has recorded a gain of 34% since the announcement of bank recapitalisation scheme in October 2017. IDBI Bank, which has been placed under prompt and corrective action (PCA) mechanism, got the highest infusion of Rs 10,610 crore, among all banks. The market seemed to anticipate this big infusion as the bank’s stock closed up 5.65% on Wednesday. Shares of other banks like Allahabad Bank, Bank of India and Oriental Bank of Commerce, which are also under PCA, gained between 0.55% and 3.38%. Shares of SBI appreciated by 3.38%. Stocks of Punjab National Bank and Bank of Baroda too notched up gains of 5.19% and 2.83%, respectively. Market participants said there is an expectation among investors that the worst is over regarding asset quality for PSU banks. “For banks it is a fresh lease of life,” said a fund manager on condition of anonymity. This echoed what the finance ministry emphasised repeatedly at the time of announcing the recapitalisation plan details that the Centre stands firmly behind the public sector banks and will ensure they do not fail.

When asked about how this will affect the performance of PSB stocks, A Prabhakar, head of research at IDBI Capital, said, “The recapitalisation was known to the market and stocks have already run up.” Broadly indicating that besides the finer print of which bank got how much, there was no fresh information to warrant any revision in sector outlook. A market veteran on the condition of anonymity said, “markets expected that stronger PSUs would get more money but it happens so that banks under PCA are getting more money. So, the weaker PSUs will start to rally.” This sentiment is shared by a few others, who anticipated that the fund infusion will be linked to bank practices and performance. A few analysts FE spoke to suggested that ensuring that all banks meet the regulatory standards on capital was more important as a first step. They expect that some qualitative assessment may be considered before the next round is infused.

There is also a section of market participants who are not enthused by the government’s recapitalisation plan. “The money will go back into funding the deficit. It will be all be circular trading. So it will all go and sit in the SLR bonds. Nobody is now going and lending for fear that tomorrow there can be a case. Commercial decisions can go bad if you start to make it very dangerous for a banker to lend money. Who will go and loan money?” said a market participant on condition of anonymity.