Any PSU bank worth investment?


PSU banks hit fresh 52-week low; analysts remain cautious.

Is it time to be greedy when everyone is fearful or should we skip ?

For Short term lot of headwinds, for long term can we find a PSU bank stock which can give good returns

Kindly share your views…


AS the bounce back in prices of some of them today such as Bank of Baroda , Union Bank Of india etc suggest that Psu banks can be accumulated at this stage slowly .Allahabad bank has shown good numbers.More expert views will strengthen the idea .

PSU banks hitting 52 week low is not a good enough reason to get interested. Take a look at the problems they have and try to understand why private banks are valued higher, take a realistic view of whether this is going to change in the near term? Do not put good money on bad stocks, there is not a dearth for good companies in the market.


Invested in Andhra Bank since last quarter, but seems that the market flavour is anti-psu. So even if a psu does well it wont go up. The same amount of growth does wonders for a private companies stock.

Banks are not valued for growth they are valued for how they manage their risk. Growth with poor risk management is not good for anybody. The valuation of PSU banks is a old topic, please do a google search and you should find some answers (either here on valuepickr or on theequitydesk).

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The primary concern in PSU banks is asset quality. So if one is interested in this basket, one way to analyse these is to list down the Net NPAs and Restructured Assets and assume that all are written off from the networth. Then calculate the Price to Adjusted Book Value. This will indicate the relative strength of the banks on as-is basis. From the shortlist, one can then study further about past growth rates, NII, NIM’s and other P&L numbers.

One can also list down the quarterly FII holding in these banks. The ones which have seen a decline in holdings are likely to see first interest from FIIs when things look better. I had done this a year back(early 2014) and attaching the numbers below for interest.

To give an example, in early 2014 when I had compiled some nos., from the above criteria (writing off NPA+Restr), SBI had a (then) Price to Adjusted BV of 1.91 whereas Union Bank had 9.21. Dena Bank had negative networth. However, I hadnt invested at that time. Will not be investing now also.


If we look at CAR (Capital Adequacy Ratio) in meeting Basel III norms , Indian Bank looks better than other PSU banks.

more details



Indian Bank is the most corrupt PSU bank and is known for its inefficiency. Do you want to invest in this. People used to rate BOB very high and I know some of the well known and conservative brokerage invested for their clients. They are all staring at huge losses now. The main problem here is the unpredictability of asset quality and that is the main reason in BOB.

You can invest in PSU banks in a corruption free India. Do you think it is possible.



I even doubt the asset quality of Pvt banks. I had joined as a trainee in one of the reputed financial power house. I had served there for three months after quitting that sector for joining IT industry. I know how NPAs were kept low. Loans were either transferred to subsidiaries or old loans were closed and new loans were issued to make NPAs look less. Since I was a fresher then I did not understand the process and practice well. I am not sure of whether that is the practice even now. So I stayed away from that company for investment purpose. They could also be legally correct but I am not convinced to trust.

One of my friend told that he has got two loans for purchasing a single site. One personal and another as site purchase loan as under site purchase loan, that bank cannot lend more than 50%. In effect the bank has lent 100%. Some can argue that this is a business tactic and as long as the customer has the capacity to repay, it is fine but in reality the bank has gone overboard and lent 100%. That’s how I see it. In this case it was a top notch Pvt bank.

Sorry for typo if any as I am posting it from my mobile.


Hi Guys,

Did an analysis on PSU banks, idea was to see how they did during the last down cycle of 1998-2002 and look for any patterns that might exist. Posting here the full note, link to blog is here:

At the moment public sector banks (PSBs) are going through a rough patch – increasing stressed assets and scarcity of capital are two major causes of worry. This has meant very low valuations for these banks and inability to grow at historical rates even if the economy starts to pick-up in near future.

Last 3-4 years have been very challenging for banking sector as a whole and more so for PSBs. Low credit off take in the economy coupled with crippled risk management at PSBs ensured poor asset quality. Below is a snapshot depicting how situation has deteriorated over last 4 years –

A look at previous down-cycle of 1998-2002 shows that PSBs had stressed assets at ~13% of loan book. Couple of the banks# had stressed assets as high as ~30% of their respective loan book. Credit growth slowed down to 16%. Banks* traded at an average P/B valuation of 0.6x during this period. What followed after that is history – from 2002-2008, loan book grew at a CAGR of 24%, stressed assets declined from 11% to 3%, stock prices** returned an average of 800%. During the same time period benchmark index BSE SENSEX returned 350%. What triggered this outperformance? There are several reasons for that, all intertwined with each other, namely 1) decline in interest rates, 2) GDP growth, 3) declining NPAs 4) recapitalization by promoter

There are similar examples of banking crisis in other countries. Common measures undertaken to improve the situation of banks were, recapitalization by respective govt, interest rate cuts and regulatory reforms. Please see below for a brief summary of banking crisis in Sweden, Japan, Spain and Mexico.

Changing Scenario

Economic growth seems to be the top priority for the Modi govt. As per Madan Sabnavis, chief economist, CARE Ratings, 8-10% real GDP growth (base year 2004-05) will require credit growth of 18-20%. Historically, credit growth has seen a multiplier of 1.3x of nominal GDP growth rate. PSBs form 76% of total credit in the system and their full-fledged participation will be crucial for the desired economic growth rate of 8-10% (base year 2004-05). As per some estimates PSBs are expected to grow at a meagre rate of 8-10% for next 4-5 years because of scarcity of capital. This will lead to slow credit growth of ~12-13% in the system which will not be sufficient to grow the economy by 8-10%. From the above argument, we can deduce turnaround of PSBs should be the indirect top priority of Modi govt. In fact there are some early sings of changes already in place such as declining interest rates, improving macro numbers such as inflation, IIP etc and announcements around banking reforms which include more autonomy to banks, top management hiring from private sector, performance linked salary structure for top management, longer duration of MD, separate posts for chairman and MD for better board governance, construction of bank board bureau, recapitalization and reforms in industries causing maximum NPAs etc.

Is there a pattern that we can draw between last down cycle and the current one? Table below compares two down cycles on few key metrics:

In addition to this, the other pattern that emerges between the two down cycles is recapitalization^^ by govt of India. Until 2002, recapitalization was done to the extent of 12,000 Cr, which provided enough liquidity to grow by the time economic growth picked up, which acted as a strong catalyst for turnaround of PSBs. Between FY02 - FY08, loan book of PSBs grew at a CAGR of 24%. We see similar pattern emerging this time around, by fiscal 2015 end, govt had already infused ~65,000 Cr of capital into PSBs and has further plans to infuse 70,000 Cr during next 4 years. Capital being the life-line of a bank, these recapitalization plans might, once again, provide required breathing space to PSBs. Using this capital, they, once again, have an opportunity to improve their balance sheet enough to attract outside capital which can further provide them breathing space to grow like before.

Inverse Relationship between growth of GDP and of Stressed Assets

Banking is a cyclical industry in-tune with economic growth. Asset quality of banks deteriorates sharply when economic growth engine slows down because of poor cash flow generation at borrowers’ end. Asset quality situation reverses when growth picks up as visible from the chat below:

Current valuations of PSBs seem very attractive if we compare them to last down cycle and how they improved during the ensuing economic recovery. Chart below demonstrates strong correlation between asset quality (stressed assets) and valuations (P/B):

We might question quality of the book PSBs carry on their balance sheet making P/B metric irrelevant. Well, that has always been the case, is this time any different?

Comments Invited!

Notes –

  • There were 10 PSBs listed on stock exchange starting 1998

** There were 17 PSB stocks listed in 2002

^^ During whole of 1990s govt infused ~16,000 Cr of capital, 2% of GDP and over the last 15 years govt has infused 81,000 Cr of capital into PSBs, majority of which came during last 5 years

Source: Ace Equity, RBI, Press Search

Disclaimer: This is not a recommendation to Buy/Sell/Hold. Registration Status with SEBI: I am not registered with SEBI under SEBI (Research Analysts) Regulations, 2014. As per the clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”


In my opinion the larger PSU banks, the likes of SBI, BoB, PNB, Union Bank may be good options to keep a watch on. The smaller ones will have a tough time both from a financial capitalization and competitive landscape perspective with more private banks, NBFCs and payment banks.

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PSU banks will not perform like their private sector counterparts for many evident reasons. But that doesn’t make them a complete no for investment. SBI is the proxy for Indian economy (sure you’ve heard this many a times).

The Govt of India controls the managements of the PSBs in almost all the aspects. From the calls made by Secretary, DFS to LIC & treasury heads to subscribe to failed FPOs and to ensure support for the various social initiatives of Modi Sarkar. These social programs involve additional costs and no private sector bank does what these PSBs do. Just take a look at the rural/urban branch ratio of private sector banks and you’ll see what I’m referring to.

The private sector banks earn a considerable amount of fee from the (mis)selling of products (insurance/derivatives). If you follow some banking news, there have been news of how even some corrupt PSB employees have debited customer accounts for selling insurance without their consent and earned lakhs as incentive.

We could talk a lot about how they go about doing their day to day business. Coming to investment worth of the PSU banks, there will be more competition from the Payment Banks & the new licensees. If you have a realistic expectation of returns with a holding capacity, you can find value in select PSBs. Else you can try find the next multi-bagger and deploy your capital there.

Has anybody taken a note of this? Looks good but not sure of the impact on minority share holders. Also the detailed list of each company isn’t available.

I have committed a sin of buying into PSU (my early days) and will never enter into any regulated or cyclical area until I really understand the business in totality in future. :pensive:
For now looking to get out of the PSU sector.

Disc - Invested in Allahabad Bank

many of those companies are cases of fraud and mismanagement, even if the Banks bring in a new management after SDR, those businesses will never see previous highs
also the positive of debt recast of the power discoms seems to be factored in, it’ll only allow the banks to extend new facilities to discoms and will take a while with States already facing budgetary pressures

A good analysis. I must say you have taken pains to collate and analyse. Thank you

Stress Test of Indian Banks suggested by Akash Prakash of Amansa capital:-

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This one reform will be a gamechanger for banks: Dipen Sheth

Read more at:

Can someone who monitors this sector give a safe price at which one can sell one’s real estate to buy psu bank ?

Surely they cant be worth zero !!

Pls mention about SBI / PNB / Canara / BOB only

why do you want to travel in a faulty aircraft and/or which has incompetent pilots?

scenario : PNB writes off all bad loans. stock comes to 35. FDI picks up 49% and puts its nominees on the board. All political interference stops. Share becomes multi bagger from there . Possible ?