|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.
- State Bank of India
- Punjab National Bank
- Bank of Baroda
- Canara Bank
- Bank of India
- 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?