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| PSU Banks | Can they make money for your portfolio? |
Beware – The tone of this post might make you feel that this post is a recommendation to buy the stocks discussed. But that is as far as it can be from the real truth. It is your money. Weigh your options before investing your hard earned money anywhere.
Now I completely understand that there are some very big concerns like –
- Deteriorating Asset Quality (Rising NPAs)
- Competition from existing Private Sector Banks like HDFC, ICICI, Axis, Yes, etc.
- Increased chances of new aggressive corporates like Reliance, L&T, Aditya Birla getting banking licenses
And every time I open a business newspaper, all I get to read is about the financial sector, is related to rising problems of public sector banks (PSB). And how the NPA issue is likely to continue for some more quarters to come. And if you do track reports by brokerages, you would know that most of these are begging their clients to stay away from PSBs and to park their funds in private sector banks. So all in all, its quite obvious that currently, the sentiments surrounding PSU banks is quite negative and it may not be a wise step to expect any kind of re-rating of this sector. But when one sees Price to Book Value multiples of 0.80, 0.50 and even 0.30, then one is forced to wonder whether things are really that bad or is it a clear case of over-pessimism?
Now, I personally feel that though things might be pretty bad for these banks now and for next few quarters, there is a reasonably good chance that they might improve if one is ready to hold onto a few of them for next 3-5 years. I am not saying that these will be multi-baggers. And I am also not saying that these will not be multi-baggers. All I am saying here is that these would give returns which should easily beat the returns given by other riskless investment vehicles like FDs, RDs, NSCs etc. Now you must understand that I am trying to make a prediction here. And fundamentally, that is not a wise thing to do. But just to keep a check on how well my predictions pan out, I will pick a few large and small public sector banking stocks and keep a track of them every 3-6 months.
And to track the PSU banking space, I am picking 5 large and 5 small(er) PSU banks.
Larger PSBs
- State Bank of India
- Punjab National Bank
- Bank of Baroda
- Canara Bank
- Bank of India
Smaller PSBs
- Syndicate Bank
- Allahabad Bank
- Corporation Bank
- Andhra Bank
- Vijaya Bank
What are my expectations from this collection of stocks?
I expect them to collectively give better returns than index (Nifty50) in next 5 years.
How Do I plan Tracking it?
Starting today, I will create an equal weight index of these PSU banks and track it against Nifty50 once every 3 months. This hypothetical index may go up and down in near term. But at the end of 5 years, I believe that it would provide better returns than the index as a whole. And this would be without any consideration for generous dividends which PSU banks dole out everytime.
Am I investing my own money in these stocks?
Not in all. But I have long positions in a few of them.
(Disclaimer – I also have long positions in few Private sector banks as well.)
For record, the prices of all of these stocks as on 10th November 2013 are given in table below. A notional sum of Rs 10,000 would be invested in each of these names to purchase shares (no. of shares may be fractional). This sum of one lac invested in 10 stocks would then be monitored and benchmarked against Nifty50 every 3rd month.
The exact reason of choosing these particular banks is not important here. I am just trying to gauge whether the kind of theoretical undervaluation which is being witnessed in PSU banking space currently, will be corrected in next five years or not? But, the top 5 banks in the list are the 5 largest PSU banks. Rest five have been chosen without any particular reason or because I fancy their names. You can choose your own set of PSU banks in case you plan to track them independently.
Another way to track the broad changes in PSU banking space is to keep a track of Nifty PSU Bank index. This index is made of shares of 12 government owned banks.
So what do you feel? Will the PSU banks make money in next 5 years or they are headed the Air India-, BSNL-, MTNL-way?
(Updated in February 2016) – You can my views about fall in share prices of PSU banks in article – Are you worried about falling Bank Stocks?
I too agree with you on the fact that 5 years down the lane the index created by you is having a good chance of outperforming the NIFTY 50, but I would rather suggest to compare this index with private sector banks index created similarly …..
I also agree !! “Be Greedy when everybody is fearful…”.
They are headed BSNL , MTNL ,AIR INDIA way….
Hopefully, it should work out this time. But markets have an uncanny knack of surprising us. After 5 years, I hope its not a negative one 😉
That's a good suggestion. But here the aim is not to find which of the two (Private or Public sector banks) are giving better returns. The aim is simply to beat the returns given by risk free investments. But, I agree with you, it would be interesting to compare the returns with private counterparts too. Suggestions about which private banks to include?
That's a valid fear 🙁
Hi,
I have invested in the PSU BANK index looking at its attractiveness 18 months back… The index is still attractive… BTW the index has only 10 stocks not 12…
Basically what you are doing is PSU Bank Large cap (5) which are in the index and PSU Bank mid and small cap (5) based on your thoughts…
They are now trading at the all time low P/BV…
What i feel is PSU Bank job moved away from the 9 to 5 jobs… So not sure what the Private players do very innovatively… If i look at the metrics from the PSU banks they have grown similar to Pvt Banks..
I have picked 3 banks (all in the small banks only thing missing from your list was Indian Bank :-))
I invest in the 3 banks (all in the mid and small banks).. My thought is if i can get a 8 – 9 % dividend on my investments then thats not a less risk investment (post tax) compared to the other instruments such as FD or PF… Remember they wont stop paying you dividend (because you are not active) as compared to the PF authorities who classify your account as Dormant and not pay any returns…
My horizon is 10 years… My return expectation including the dividend is TWICE the so call risk free investment called PF..
regards
Jai
Hi Stable Investor….I just have a suggestion of creating your portfolio mix based on the ratio of the number of shares outstanding for each of these companies because that can be compared better with the Nifty50 benchmark as Nifty50 is calculated based on Free-float Market Capitalization methodology
That's a valid thought Rahul. But just to keep things a little simple in this 'tracker' portfolio, I have decided to keep 10 stocks having equal initial weightage. But weightage in ratio of outstanding shares can also be a way to track this sector.
Well said Jai.
And you are right that this sector is looking quite attractive since a long time. But it eventually boils down to showing courage (backed by cash) in times of crisis. So those who have been investing in this sector for a while would most probably be richer at the end of next 5 years 🙂
Which are the other two banks you have been investing in? And I just check the CNX PSU Bank index again. It comprises of shares of 12 banks.
I think we could see even cheaper valuations going forward ( Short term) . For a 5 year horizon i think they could give very decent returns.
Still trying to understand the long position though
Andhra bank and Syndicate bank… – I have not invested as all my orders expire – Valid till close for the last 45 days…
Even in indian bank my orders other than when nifty was at 5250 – 5400 expired..
I would not buy now… When the market corrects i will initiate again…
Thanks
Jai
I would like you to create a similar Private sector Bank index with the below list :
ICICI
HDFC
Kotak Mahindra
Axis
JK Bank (I like this Bank and would like to add to my personal portfolio near future.)
Small Banks
South Indian Bank
DCB ( I have small personal holding in this bank)
CUB
Karnataka Bank
Dhanalakshmi Bank
A very interesting post.
To take Jai's below thesis forward, as per some calculations I had done some time back (and I may be completely wrong), at current depressed valuations (and relatively higher dividend yields of 3% to 5%), some PSU Banks may yield progressively more than their own fds over next 5-10 years. In other words, for someone looking at supplementing his monthly income, instead of buying a 5 or 10 year monthly income certificate at 8% or 9% (taxable) in a PSU Bank, it might be better to actually buy (after adequate research) the same amount worth of stocks, which might end up yielding eventually 15% (on initial cost) or so in next 10 years [an implied ROE of 12% or so over the next 10 years], and that too tax-free (as of today in India dividends are still tax-free at the hand of investors).
And in all this I have not taken into account capital appreciation at all. In this kind of an investment theme, that would be merely an icing.
[PS: I have invested based on this theme, and it may and may not work out in the end and I may be completely wrong]
Your 'Yield-On-Cost' logic makes a lot of sense for someone who is ready to stay invested for quite a long time. I personally know someone who now earns a yield of almost 600% per year (on-cost) on one of his investments which he made almost a few decades back!! But that was in FMCG business. But it might also happen in banking space as well as India is quite under-banked as a nation, and PSU banks have a lot of scope to grow if they are able to lend sensibly and without 'too-much' of politically 'forced' thinking.
Hey,
I trust the FMCG data… Here are recent examples or my hindsight bias or what stable investor always calls about having cash to deploy (which is the critical thing)
..
The one stock i will not forget is HCL tech… Nadar said guys HCL is yielding 8 % back in Dec'08… Watch the CNBC interview… From their its a 12 bagger :-)… 13 % yield on cost…
One would have gone with TCS at the same time and it was a 10 bagger and yield on cost is 8 % now … 10.5 % yield on cost…
The big difference is HCL / TCS have good business models.. very low debts and they are large caps but were not favorites…..
The big question on the PSU Banks is how Mr Rajan and the govt plan their future – Will they be privatised or merged with large PSU Banks.. Is the govt planning to provide Tier 1 Capital… Stable investor – Hope you will enrich by providing the details
.
Thanks
Jai
By the way don't know why none of the CNBC specialists call the TCS or HCL Tech as 10 Baggers… They will call some mid caps but not this…
Thanks
Jai
Nice insights Jai.
But I am afraid that being a part of average investor community, I myself have no clue as to what RBI would decide in near future.
And if one is talking about large cap companies which have proven and sustainable businesses, it has been empirically found that whenever these companies are going through bad publicity and are not on market radars, it is actually a good time to enter these stocks.
True. May be its time to either switch those business channels or to just watch them for eye-candy quotient 😉
Warren Buffet said that one should not pay dividend when they can't afford it. If you continue doing that then you would not have money to invest in your core business. PSU banks are doing exactly that and are not capitalized adequately. When your price are down you need to dilute more equity for same amount of funds. I would not touch them.
Jo baat Bahar ujaade use kaun bachaye…
Hi Dev,
Could you share your take on Union Bank's current evaluation? Say, compared to Canara / other PSU Banks?
I'm optimistic on holding the same for the next 10 years. It's P/B is only 0.53, P/E is 5.4, 3% Div. Its NPA's though, are a very high %, esp when compared to private sector banks.
Thanks.