Brokerage suggests that valuations of PSU banks are becoming less attractive

New Delhi, Feb 29 (IANS) – According to a report by Kotak Institutional Equities, the current credit environment has been favorable for PSU banks, aiding asset quality. Profitability has been bolstered by provision reversals and recovery from bad loans. However, there are concerns about the sustainability of these factors.

The report highlights that while bad loan recoveries have supported revenues, there is a looming decline in this trend. PSU banks are currently managing a significant pool of bad loans, which have been a source of steady recoveries. This has led to provision reversals and substantial revenue generation.

As the pool of bad loans ages and diminishes, there will be a natural decline in recoveries, impacting profitability. The report warns that Tier-2 PSU banks may struggle to maintain better return ratios compared to SBI. In light of these factors, Kotak Institutional Equities has downgraded Canara Bank and PNB due to the swift re-rating of valuation multiples.

Despite early warning indicators showing no cause for concern, the gradual decline in bad loan recoveries poses a long-term challenge for PSU banks. The sustainability of profitability in the face of this trend remains uncertain. This development underscores the need for proactive measures to address asset quality and revenue generation in the banking sector.

In conclusion, while PSU banks have benefited from the current credit environment, challenges lie ahead in maintaining profitability amid a projected decline in bad loan recoveries. The report serves as a reminder for banks to focus on prudent risk management and revenue diversification strategies to navigate future uncertainties in the financial landscape.