Finance Minister to hold meeting at 3.30 PM today to discuss PSU banks recapitalization. The focus is expected to be on non-PCA (non- prompt corrective action banks) and may be larger banks. The stock to trade higher with positive bias after this news.
A mega re-capitalisation programme was announced by the government in October to counter the rising bad loans of public sector banks. The plan was worth Rs2.11 lakh cr (~1.6% of FY17 GDP) out of which Rs1,35,00cr will be in the form of front-loaded recapitalisation bonds. This would allow the banks to agree on the haircuts needed to achieve successful resolution by state-owned banks in resolving the bad loan problem and meet the new capital adequacy norms by FY19E. The proposed move will likely help re-rate state-owned banks from their depressed valuations. Large state-owned banks, namely, SBI, BOB, and PNB, are likely to be the key beneficiaries of the government action. We believe reported profitability of state-owned banks would remain depressed due to the accelerated provisioning requirement through FY19E. Our top picks in the PSU bank space are SBI, BOB, PNB, Canara Bank and Indian Bank.