The government on Tuesday announced Rs 2.11 lakh crore recapitalisation plan for state-owned banks and approved mega infrastructure projects worth Rs 6.92 lakh crore as part of a broad plan to create thousands of new jobs, raise income, boost investment and quicken growth in the broader economy.
Riding high on recapitalisation plans, PSU banks have rallied massively. The NSE PSU Bank index has soared more than 24% led by gains in SBI, PNB, Bank Baroda, Bank India and Union Bank, among others. However, shares of Private Banks, except ICICI Bank and Axis bank, and other NBFCs have been under pressure.
The move to recapitalise will ease the capital deficiency. It can also lead to some additional lending. However, to start with, it will largely address asset quality stress and act as precursor to consolidation. If NPA resolution has to occur, Banks will require capital for taking the haircut and they don’t have it currently. Many of the banks are actually on negative net worth. Demonetisation has created liquidity in the system and the recapitalisation Bonds are a good way to suck up liquidity and infuse money into the banks. With the funds raised by the government through the issue of recapitalization bonds, the government could infuse capital into the stressed banks. This way, the surplus liquidity of the banks will be used more effectively and in the process, the banks will also be better capitalised and now become capable of expanding their asset books as well as negotiating with stressed clients for haircuts.
Finding the pearls among the oyster!
We analyse sets of PSU banks based on their technical parameters for significant investment opportunities.PSU bank stocks have fallen dramatically in the last two years and this has primarily been because of a long private bank- short Psu bank type of trade that has emerged among the institutional and other traders in the market. This trade worked out beautifully as the pair went in opposite directions, a dream come true for a pair trader! Many of these stocks were also available in the F&O segment and were active in option trading too, creating additional Call option writing or hedged short trades being created in them, adding to the selling pressure. All these led to a situation where almost all names were carrying substantial short positions. So when the news hit the markets, there has been a rush to cover the shorts and this has produced the fantastic moves that we have seen over the last couple of sessions.
What this news has done is to create a bottom for Psu bank stocks. The strong short covering trade has also produced or set off a larger degree rally in many of the names. Now that a top (made back in 2014 or 2015) and a bottom has been established, we can run some technical checks to establish which of the stocks appear to be well placed to be worthy of investing. The Institutional ownership in Psu banks is quite negligible. Now with news flow making them attractive over the longer term, it is quite likely that there could be some shift from the private banks into these Psu banks. This can produce a sustained rise in some of these Psu banks.
We have broadly categorised stock based on their Technical Parameters:
- Stocks that are challenging their all-time high levels: State Bank of India, Indian Bank and Bank of Barodashow the best technical pictures among the entire list of bank stocks. These have rallied to above either 61.8% or 78.6% retracement of the overall decline witnessed from their respective all time highs. SBI and Indian Bank trades around the peak levels while Bank of Baroda trades above 61.8% retracement levels.We can expect these stocks to challenge their all-time highs and move higher too. Hence they form the first list of stocks that one should buy with long term view in mind.
Observations based on technical aspects: SBI and Bank of Baroda Long term chart show price at the overhead resisting trendline zone attempt fresh breakout after quite a decent rally from lower levels. On the other hand, Indian Bank continues for the second time above the previous peak and sustains. On momentum front, RSI for SBI and Indian Bank trades above 60 while Bank of Baroda awaits the shift in range towards higher levels. ADX line has been rising through a previous couple of months for SBI and Indian Bank while ADX for Bank of Baroda remains flattish to low (Note: DI+ line continues to dominate the overall rally seen in SBI and Indian Bank while Bank of Baroda has just witnessed a positive crossover and must wait for confirmative signal). These signals suggest that Bank of Baroda may take some more time to shape up as of now and hence focus on SBI and Indian Bank should be greater. Indian Bank faces some continued resistances from former swing low resistance (placed at the recent highs) while a flat ADXline indicates a halt in rally. So, currently, SBI price action and momentum are best poised for the rally to persist. We expected SBI to stage breakout above the levels and continue further towards 404-408 levels (the Fibonacci cluster formed by 127.2% retracement of the range decline with 100% ABC pattern of current rally and correction)
- Stocks that have recovered above their minimal (38.2%) retracement levels:
These set of stocks has witnessed strong up move above their minimal retracement levels of 38.2% of the declines from all time highs. Considering their recent couple of weeks up move and backed by news-flow, these stocks have already set their trajectory for the next leg of rise. PNB, Canara Bank, Vijaya Bank and Central Bank are uncovering their up-trend. We expect a higher degree of resistance levels with formation of Fibonacci clusters as their target potentials.Observations based on technical aspects:
- Punjab National Bank: Stock has recovered quite well and pared losses for the past 2 months in a single day. This has led Price to recover above 50% retracement of the overall decline from all time highs. Resistance has been registered around 234 levels that confluence of 78.6% retracement of the decline and previous couple of peaks.
- Canara Bank: Stock has been gradually in demand throughout the day and challenges the highs made around 2012, 2013 and 2015 at same juncture (486 levels) which also is 50% retracement of the decline from all time highs. Meanwhile, Price breaks above the overhead resisting trendline and sustains with RSI staging fresh breakout from 60 levels. Thus, higher degree retracement of 61.8% at 565 can be seen as long term resistance with intermediate hurdle at 486.
- Vijaya Bank: Stock tests 50% retracement levels around 71-72 and drops lower. Stock has already tested 61.8% retracement in recent and had witnessed pullback. The next leg is expected to continue the gains further towards testing its peak around 115 with intermediate hurdle at 97 (78.6% retracement level)
- Central Bank: Price has continued upwards forming higher lows and has sustained with the gains trading above 23.6% retracement of the decline from lifetime highs. The rally in the past has been restricted to 38.2% retracement which can act as intermediate resistance to the current up-move. Weekly RSI has just recovered from 40 levels heading towards 60. Price breaking above the 38.2% retracement will lead it towards 147 levels (61.8% retracement) with intermediate resistance at 127 (50% retracement)
PNB dominates with a large-sized balance sheet and is, therefore, a natural pick among this lot as it will be one of the big gainers from the recapitalisation drive. Canara Bank is a high Beta stock among the lot and may be a good trading pick for those that like to play the futures. Vijaya Bank chart is certainly more attractive compared to the earlier two but lags them in trend because the size of the bank is not too large. It can, however, be favored by smaller investors as a decent pick. Central Bank somehow doesn’t really make the cut for now. So the two best picks from this lot are PNB and Vijaya Bank.
- Stocks that are trading at or just below 23.6% retracement levels: Bank of India, Union Bank, Syndicate Bank, Andhra bank, Allahabad Bank, Corporation Bank, J&K Bank and Oriental Bank of Commerce are such PSU stocks. These stocks have quantified their recent price actions and show sign of rebound and higher ground ahead. Potential observations based on technical aspects:
- Bank of India: The stock has been in steady decline from last more than two years and every rise in price have been used as selling opportunity. However stock witnessed strong surge with gain of 34% in just a day post the news which has never been witnessed earlier before from last more than 30-35 years. Currently stock is trading near 38.2% retracement levels from 2014 highs and if price continues to holds above this levels (184-186) further upside in this counter can be witnessed towards 248-251 levels which is 61.8% retracement levels in medium to long term.
- Union Bank: This stock as well has been trading with negative bias from last couple of year as like other PSU banks. Stock registered a high of 427 levels in 2010 and after that this stock is under the dominance of bears. The strong surge in price due to positive news flow led price to hit 23.6% retracement levels from all time highs of 427 levels. Thus this level can act as a hurdle for the stock to stage higher. However, if momentum continue to persists stock can edge higher to test 262 levels which is 50% retracement levels and strong supply zone while 222-227 can act as intermediate resistance in medium term which is 38.2% retracement level.
- Syndicate Bank: This PSU stock also has been the laggard since July 2014 like other PSU stock and has the similar price pattern like union bank. The surge in price post news reform helped price to gain 18% in a day which led price to breach above 23.6% retracement levels. Thus if price continues to hold above 78-80 levels price can continue to rally higher towards 130 level in long run which is 61.8% retracement level of its previous whole decline which also collides with strong supply zone.
- Andhra Bank: This stock has not yet able to breach 23.6% retracement level from highs of 2010 levels. To continue its up move price will have decisively break above 77 levels which is 23.6% retracements. Successful trading above this level we can see some upside move towards 98-101 level in medium term which is 38.2% retracement levels and above that 114-117 levels can act a key resistance which is 50% retracement levels from 2010 highs.
- Allahabad Bank: Post series of decline from 2010 highs 271 stock found the support near 39 levels which was its previous key demand zone as from this level stock made a journey to all time highs in year 2009. However if we take the retracement levels from the all time high (271) stock has not yet to clear 23.6% retracement level which is placed near 94 levels and can act as hurdle for price to stage higher. Successfully trading above this level we can witness positive momentum to emerge and hope price to extend its rally towards 155 levels in long rum which is 50% retracement levels and its previous peak. However, before that 128 can act as an intermediate hurdle in medium term which is 38.20% retracement level.
- Corporation Bank:The similar price pattern can be seen in this PSU stock as well compared to Allahabad bank. This stock as well made a life time high in 2010 and after stock has been in steady decline. This decline halted near 30 levels where stock has strong support zone. In 2009 from this levels stock made a journey towards life time highs of 163. However to continue its upside momentum price will have to breach above 23.6% retracement level of its overall fall which is placed near 81-82 levels. After this, in this longer term we can expect price to move higher towards 50% retracement of its previous whole downfall which is placed near 95-98 levels.
- J&K Bank: The sideways action in weekly timeframe restricted between lows and 23.6% retracement of the decline from all time highs forms double bottom pattern. Stock has struggled quite for a long time and seen recovering back to the 23.6% retracement levels. Moving ahead to the resistance zone, the impact of the pattern will led price to surpass towards 50% retracement at 127 levels where gap and previous consolidation has been cited. The intermediate hurdle at 110 (38.2% retracement) will have its impact in the medium term.
- Orient Bank: Gaining over 26% in a day, this stock has enabled itself to trade above 23.6% retracement of the declines measured from highs of 2014. The strong up move has led price to surpass above the last couple of supply areas with good volumes. The higher lows formation has continued further and indicates price action to persist. Stock has already tested 38.2% retracement in recent times and is expected to continue breaking above the levels after s bit of consolidation at the juncture. We expect stock towards 262 levels where resistance cluster confluence of 61.8% retracement of the decline from 2014 highs and 38.2% retracement of the declines from all time highs has been placed.
From among this big list of stocks, we find that the patterns of J&K Bank are the best of the lot and hence would pick that stock as the best play among this lot for medium term investing. The rest of the stocks can be looked at from a trading perspective.
- Stocks that are trading near 52 weeks low: UCO bank, Dena Bank, Indian Overseas Bank, Bank of Maharashtra and IDBI Bankhave been trading near their 52 weeks low levels and have recovered a tad.The technical picture in these stocks is quite weak and hence none of these are worth considering as investment candidates. They may make some moves but even as a trading bet these stocks could be quite risky. If one checks these out fundamentally, one will find that they are the ones with the weakest fundamentals among the Psu bank lot.
The grouping above based on price action more or less reflects the situation in the fundamentals of each of these bank stocks. SBI suffered the least because it has the largest book and is the only one that actually gained in market in the last two years! The ROA, a measure of profitability, is the highest for SBI, Indian Bank and for Vijaya Bank. The stocks that have the weakest picture are all the ones which have net NPA higher than 10% and among the ones that are in real danger of breaching (or have breached) their capital buffer levels! Also, they are also the stocks that have recorded negative readings for advances and collectively, their assets are less than the standalone asset book of SBI!
These entities weighed down by asset quality woes are increasingly losing their relevance in incremental business. If we look at the share of these ten banks in the incremental share of system credit, the figure is negative, suggesting that they are vacating the market to the more savvy competitors! No wonder then, their charts are showing a rather woeful picture. These are stocks to totally avoid or choose only after deep checks on changes.
Banks like BOB, Vijaya, Canara, BOIetc show improvement in market share as well but not as much as SBI. Improving performances (Indian Bank) and large balance sheet (PNB) make additional inclusions in the more positive pictures being seen on the charts. These are the banks that are likely to survive the tougher times ahead and hence among the only ones that one should look at for now.
The strong showing of yesterday has led to all stocks rising. This will present us with some opportunities to get out of some of the PSU banks and to move into others. The table below summarises the best picks based on combining Technicals and Fundamentals.