Most PSU banking shares have halved from peak levels

Several PSU banking shares have almost halved in value from peak levels. Union Bank, whose shares hit a 52-week high of Rs 205, is now available at Rs 111.

Similarly, PNB, which hit a peak of Rs 230 is now available at Rs 116. Others like Canara Bank, Bank of Baroda etc., may not have halved but have definitely fallen 30 to 40 per cent from peak levels.

To be honest, though the sector is in shambles, there is very little downside risk that would be there in some of these stocks. So, the risk to reward ratio is completely in favour and there could be many other reasons to buy as well. 

NPAs are showing signs of bottoming out

Non performing assets would definitely bottom out as the debt resolution process gathers shape. For example, the bid of Tata Steel for Bhushan Steel if goes through would reduce substantially the NPAs of some of the banks having exposure to Bhushan Steel.

Similarly, for many other large accounts like Electrosteel, Videocon etc.,where there maybe suitors

It is highly likely that non performing assets in the banking sector would reduce and with regards to the same, you can look at buying into some of the good quality banking stocks, which we shall discuss a little later in the article.

Government support to continue

Due to political compulsions, it is likely that government support to banks would continue. Despite the NPA mess, if one needs to propel the economy, bank capitalization would be paramount, no matter, who says what about public sector banks.

At the moment, talks of privatization is more easy said then done. Government banks have to channelize credit flow to the rural masses engaged in agriculture and MSME, as private sector banks are reluctant to do so. Hence, talks of privatization is at the moment unthinkable. At best the govt may reduce stake, but is unlikely to give up its majority stake in government owned banks. The recapitalization process is also likely to go through. 

Which govt banking shares should you buy?

The more solid ones is the obvious answer. These would be ones like Canara Bank, Bank of Baroda, Indian Bank and Bank of India.

What about PNB is the obvious question? This really depends on what is the kind of hit that the bank takes with regards to the Rs 11,000 crores in the Nirav Modi fraud. If PNB has to bear the entire amount, the stock may see a further downside.

Of course, the stock does have value in the sense of its huge holding in subsidiary in PNB Housing Finance and also the fact that it is almost impossible for a new bank to create a franchisee like PNB For example for a new bank, it would be almost impossible to create a branch network of 7,000 branches like PNB. 

Be a little more patient in buying

It is advisable to use dips to buy. For example if you get Union Bank at Rs 105 and Canara Bank at Rs 280, these may not be bad bets. In short, at these levels it may not be a bad idea to play the contrarian.

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