Plenty of good news makes a case for taking a look at battered bank stocks

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The banking sector recorded a drop in NPA ratio in the second half of FY2019, after consistent rise in last three-and-a-half years. Collective losses of 21 PSU banks declined to Rs 11,605 crore in the third quarter from Rs 14,743 crore in the second quarter and Rs 16,614 crore in the first quarter.

Actually, a drop in fresh slippages and some Rs 80,000 crore debt resolutions through NCLT proceedings have helped the sector reduce NPAs.

Meanwhile, banks are expecting to recover more than Rs 1 lakh crore in 2019 as several big-ticket default cases are pending. Both the government and the central bank have initiated measures to tackle NPAs and brought about various regulatory norms. RBI has also addressed the issue of stress in the MSME sector by allowing one-time restructuring of stressed loans during January-March 2019 period.

Government’s measures such as PSU bank recapitalisation and consolidation of banks were designed to tackle bad loans of the banking sector. So far the government has consolidated the State Bank of IndiaNSE 1.10 % group while merger of Bank of Baroda, Vijaya BankNSE -0.73 % and Dena bankNSE 0.00 % is in the process.

In order to tackle NPAs, the government has announced recapitalisation of PSU banks to the tune of Rs 2.11 lakh crore in October 2017 through infusion of government capital and fund raising by banks from the market. During FY2017-18, the government infused Rs 88,139 crore in PSU banks and made provisions for Rs 65,000 crore made in the Budget for this financial year. In December 2018, the government infused Rs 28,615 crore in seven public sector banks through recapitalisation bonds. The latest government’s announcement to inject Rs 48,239 crore in 12 public sector banks this financial year will not only help banks maintain regulatory capital requirements but also help finance growth plans.

Besides, five state-run banks are likely to exit the prompt corrective action (PCA) framework soon after meeting their regulatory capital norms.

On the NPA front, the silver lining is that NPA recognition process, which started in 2015, is almost complete and now NPAs have begun to stabilise, even though they are still at an elevated level. Capital positions have softened and the provision coverage ratio has improved to some extent. Almost all PSU banks are showing remarkable improvement in recognition, provisioning, recovery and reforms.

Other data showed credit growth of scheduled commercial banks (SCBs) has improved to 14.5 per cent till February 1, 2019 from 10.6 per cent a year ago.

The government effort indicates that it has been doing a lot to make the banking sector turn around. The government’s recapitalisation exercise would increase fresh credit, and aid credit growth. This, in turn, would spur growth in the economy.

Given these developments, one may think of going long on stocks such as State bank of India, Bank of Baroda, Bank of India and United Bank.

[“source=economictimes.indiatimes.”]