Re-rating likely for PSBs as asset quality issues abate

Last year was spectacular for the banking sector, with theBankex returning 71 per cent over 12 months, while the benchmark BSE Sensex returned only half of that. Banking stocks, a proxy for the economy at large, have rallied though economic growth did not pick up significantly in the period. Will this hope rally to sustain or will sector lose steam in 2015? The Street continues to be optimistic on the sector, for a number of reasons. While the well-capitalised private banks are obviously geared to further capture share from state-owned ones, the Street is turning cautiously optimistic on the much-maligned public sector banks (PSBs), too Stock Market Trading Tips

In the middle of December, banking stocks saw some heavy selling as the rupee weakened; these rarely perform well in currency weakness. Analysts believe any correction is an opportunity to buy these. JPMorgan claims it has seen more interest in PSB names, than in the past three to four years, even in the smaller and cheaper stocks. Interest is back and there are murmur on re-rating the sector as a whole, as return ratios, argue some, are set to improve.

Like some others, JPMorgan is betting on this re-rating ofPSBs as one theme in 2015. While some like Bank of India and Punjab National Bank are slated to benefit if the rate cycle turns in 2015, the credit cycle has to turn for a sustained improvement in earnings. If rate cuts commence, credit demand is expected to revive from the second quarter of 2015. Credit growth would average 14-15 per cent in 2015, believe analysts, as the economy revives gradually Commodity Trading Tips

What is driving talk of a re-rating is the Reserve Bank of India's norms on restructuring. Analysts expect bad loan formation to drop dramatically from April, thanks to the norms on infrastructure and core sector lending. Despite an accretion of stressed assets over the past few years, Morgan Stanley sees evidence of asset quality improving.

Earnings for PSBs are set to improve, too, as credit costs would moderate marginally. Prabhudas Lilladher believes the trend of declining earnings for PSBs has abated. The brokerage says: "Consensus earnings imply compounded annual earnings growth of 24 per cent for private banks and PSBs alike, against 19 per cent for non-banking financial companies, over FY15-17 Nifty Trading Tips