Investment Opportunities in PSU Banking Stocks

There is a query from Vikas in the Comments section regarding investments in PSU Banking stocks as related with its Dividend yielding capability acting as a 'likely' Fixed income opportunity.

Hi Viral,

My question to you is ... will it be better to invest in PSU banks. Banks like IOB & Andhra Bank has declared a dividend of 45% i.e., Rs 4.5/- per share.

I've noticed that most of the PSU banks gives regular dividends on YOY basis ( so your equity investment in these banks , more or less act as FD in the long run- as you get regular returns from them).

Please let me know your views on the same?

Vikas

My Reply:

To this, i would like to say that, there certainly is a degree of truth in his way of thinking. But, the point is not absolutely taken as there are many other stocks, both from public and private sectors, with past history of good dividend yielding track record and robust performance.

Most of the PSU stocks from sectors other than Banking & Financials are also well known for good dividend yields. Being Public sector companies, these PSU stocks are impliedly obliged to fill-up the coffers of the central government (and of course, other shareholders too) by the way of regular dividend outflows on account of their majority stake in the Companies.

Coming to the Private counterparts of PSU compaies... many leading private sector companies with good cash flows are also not behind in doling out good dividends on a consistent basis. In fact, many companies also have implied policy guidelines of forking out as much as 30-50% of their quarterly profits as dividends for their shareholders.

However, the above does not mean that i am against investment in PSU Banking stocks. In fact, PSU Banks is a very good sector to invest your money with a tangible bit of safety quotient. PSU banks have a certain stricter regulatory guidance than high flying private sector banks in terms of lending operations & risk taking.

Though, during times of optimism, PSU banks also have to deal with a bit of hump with issues like expansion, raising capital, etc. due to the same regulatory hurdles. In the current scenario of severe slowdown, PSU banks have somewhat caught up with market share of private sector banks to some extent. In stead of looking at PSU banks as purely Dividend yielding stocks, i would like to recommend you to stick with only Top 4 banks from Public sector.

My 1st Preference would be banking major State Bank of India (SBI). If you prefer Mid-caps among PSU banks there are some very good banks like PNB, BOB and BOI to choose from.

Now, from Valuations point of view SBI is a bit expensive when seen from the lows of Rs.900 it has established a couple of months back. Though, the stock would provide good investment opportunity for Accumulation below Rs.1150/- to start with & more on dips.

Among BOB, PNB and BOI...

BOB looks the most expensive but this largely backed by its robust performance in quarterly results. PNB is a relatively cheaper stock in terms of valuations and is biggest PSU bank after SBI. However, even this stock has almost doubled since its lows of Rs.300/- BOI certainly looks cheapest of all the major PSU banking stocks. However, this lag is on account of relatively disappointing results in comparison to other PSU banks. Anyways, the fundamentals of BOI are too strong to lag so much behind in terms of valuations.

From investment perspective, investors need to hold out for now before plunging in for buying fundamentally strong PSU Banking stocks. At the most, investors can hand pick few units of BOI which is relatively reasonably valued in comparison to other Banking stocks. However, investors can consider accumulating these stocks on large dips during a big pull back for the current rally.

In my List of Favourite stocks in the previous blog posts, i had clearly given a Buy call for SBI and BOB from investment perspective. But, remember... personally, i would prefer to have a nice blend of PSU banks & private banks in my portfolio, preferably in favour of private banks.

BANKING & FINANCIAL SECTOR: (15% of over-all Portfolio)

10% - Banking (6% PVT Banks + 4% PSU Banks)
05% - Non Banking Financials (NBFC)

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