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PSU Banks are Losing Hell Lot of Money!! 1st Quarter Portfolio Update

Shares of PSU banks have been bleeding for some time now. And unfortunately, some time back I had created a portfolio for tracking PSU banking stocks for next 5 years. Though it has only been 3 months, the fact is that the news is not good. 🙁

The portfolio is down 11.90% compared to Nifty’s 1.5% loss. And if you remove the contribution of dividends, then it further goes down to 13.90%. Pretty bad for 3 months… Isn’t it?

But lets remind ourselves of our original expectation from this portfolio

“[We] expect these stocks to collectively give better returns than index (Nifty50) in next 5 years.”

And with this being the first quarterly update, we still have 19 more quarter to look forward to. As we all know, asset quality issues and competition from more efficient private banks still remain. But the journey has just started. A snapshot of the portfolio is given below:
PSU Banks 1st Quarter Returns

In case you want to get more details, please click on the image below to enlarge:
Detailed PSU Banks Tracker Portfolio - Quarter 1 Update
Detailed PSU Banks Tracker Portfolio – Quarter 1 Update
Please note that I am separately tracking dividends as these government entities are quite liberal in doling out dividends to their shareholders (read: government), and hence we cannot neglect the contribution of dividends in this portfolio.

One of Stable Investor’s loyal readers Subhodeep made an interesting point in the earlier post:

“Some PSU Banks may yield progressively more than their own FDs over next 5-10 years. In other words, for someone looking for supplementing his monthly income, it might be better to buy stocks, which might end up yielding eventually 15% (on initial cost) or so in next 10 years, instead of buying a 5 or 10 year monthly income certificate (8% or 9% taxable return) in the same PSU Bank.”

And this yield on cost makes quite a lot of sense. I personally know people who now earn yields in excess of 600% every year (on-cost) on their investments made almost two decades back!! 

But lets go back to banking sector for now. 🙂 March 2014 is almost here and pretty soon, its possible that there might be some important announcement about new banking licenses. So, it is once again possible that few of the PSU banking names may see a volatile quarter of price movements.

But already down close to 15%, these stocks look quite attractive for long term. What do you say? Do you think these stocks would make more money than index in next five years? Or we are not going to see these stocks make new life time highs in next 5 to 10 years?


Do share your views.

______

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18 comments

  1. Banking is a cyclic business. It makes sense to invest now in banking stocks (PSU as well as private ) and insure to continuously add positive cash flow as banking stocks are good dividend players. I am personally buying Allahbad bank, Andhra bank an Karur vyasya.

  2. I feel that though there will be short term losses (next 1-3 years), over the long run, these banks would improve their standing and become profitable again. We must realize that the banks are taking on the shape and size of the governance and the pressures being put on them… I feel that a change of governance and anti-corruption rules coming in over the next 3-5 years will improve the health of these PSUs.

  3. Hey, I agree with you, banking stocks are almost trading at their 52 week lows, i will take SBT as an eg current price is 377, P/E = 4.48 ie a 25 % returns, P/BV = 0.43, DIV YIELD = 5.30% As per benjamin graham an optimum value shall be square root of 22.5*84.35*873.00 which is RS 1287.

    This is nothing but purely undervalued. I am pretty sure if i invest 10000 rs today in 1 year time i will get 20000. Almost all the banking stocks are the same way.

    Here we have a great business, good management, good results and cash flows, stable operation, and the times of pessimism.

  4. Hi Vinay
    Choosing among these PSU banks would also depend on which other stocks I already have in my portfolio.

    It is because I try to manage my portfolio as a whole to reduce risks rather than simply adding positions irrespective of what I already hold.

    But I do like SBI & BOB among these and would prefer to add very small quantities going forward. But I would prefer to wait and watch for a few quarters before taking any bigger bets.

    Disclosure – I have existing positions in few of these stocks.

  5. Hi cycne

    I would suggest not to look only at one formula and take investment decisions. Intrinsic value is much more than just simple calculation of one formula. But I would agree with what you say that these times of pessimism are best to pick good companies.

    But please beware the doubling your money in one year might seem easy and is entirely possible, but it comes with its own set of risks. So take an informed and rational decision. Let me know in case you want some more info on what I have just said.

  6. Completely agree with you. I feel this is a good time to slowly add to your positions in PSU Banks only if you are a long term investor who is comfortable with slow growth or de-growth in short term. Also, I personally believe that these type of stocks are to be held for lifetime and enjoy dividends. I have chosen SBBJ for now but dont see it in your list. Is it because you have SBI or any other specific reason?
    Thanks

  7. I just don't understand how these psu banks function.

    The CEO or Chairman gets changed and the NPAs always goes up with new appointment. You would see massive jump in profits of one quarter and lot of expectations would be built and then in just next quarter, you would see losses and higher provisions for NPAs.

    Poor SBI which is in the business since independence and the largest bank of India does not now how to run the business. They source deposits @ 9% interest and give home loans @8.5%. After so many years of huge home loan portfolio, they realised that they are not making any profits and slashed deposit rates just yesterday especially for the long term deposits. Worse, they had issued NCDs with high interest rates.

    With NPAs growing, could not do much headway in large loan defaults (like Kingfisher), running like a social business (negative NIM), having to offer high deposit to employees (1% more than public) and lot of contractor employees (no committment to grow the organization), I think it is a matter of time these psu banks will be extinct once new licenses are issued.

    With meddling from Govt, Bank unions, RBI and also ATM burglaries, defaults, social obligations and welfare policies, very tough times are ahead. It is better if we don't touch these stocks.

  8. Correct. Even I feel that some of the private banks are well poised to grow faster than PSU Banks. It is just that the level of undervaluation (as per historical averages) is quite compelling.

  9. Hi Krish
    You have made some very valid points about the operational ans strategic issues that are bogging down PSU banks and public sector units in general. But the statement that grant of a few new licenses will eventually make the PSBs extinct is a little far fetched. Agreed that these new banking entities would grow much faster and in more efficient manner. But banking is a tough business. Its not easy being a bank with all the regulations by RBI.

    Anyways, the points about issues faced by PSU banks are quite serious. Point taken Krish. 🙂

  10. I had picked 5 of the largets PSU banks anf 5 'random' smaller ones. The same is detailed in the post above. I assume that another trigger which you might be waiting for is merger of associate banks with SBI. Isnt it?

  11. Thanks Wellwisher.
    Even I read this comment (article) by Money Control's editor on their site. There are definitely some serious allegations made in that article.
    Thanks for sharing the details with readers

  12. Hi,

    You constructed the portfolio based on dividend yield and you bought the banks after they raised in value significantly… I bought indian bank at Rs 68 – 70… This was when the nifty was at its low… Now i am waiting to add on to Indian bank, Andhra Bank and Syndicate bank when the market comes down in value it pulls down the beaten down sector fast compares to the darlings (Consumer and IT),,,

    I was reading Dandho Investor… Key point is make big bets which are not frequent… But play the waiting game till the price is attractive… I bought these bank for the div yield for me they have to be more than the FD rates 🙂

    Thanks
    Jai

  13. Great work Jai…
    It is indeed tough to catch the bottom of a falling market. I can just hope that I am able to catch the next one. And you have rightly pointed out that when one has the conviction in a company's business, and the markets have crashed, it makes sense to take bigger bets.

  14. That's right, merger is one factor. I bought it for dividend yield and it was available cheaper. Further, it has presence in a relatively progressive state for business and also i believe its well managed.
    What you think on this:
    http://www.business-standard.com/article/opinion/akash-prakash-the-state-bank-story-114021301706_1.html

    May be you can write an article on how to deal with similar noise. I imagine if common people start reading such business stories, they would be scared to even keep deposit in banks 🙂

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