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Arya Nanda made post

How will UCO Bank and IOB benefit from the capital infusion by the government? Is it a good time to start picking PSU banking stocks?

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Deepa Salunkhe answered.
8 months ago

Indian Overseas Bank (IOB) will get a fresh capital infusion of Rs.4,360 crore from the government in the current financial year (before March 2020) for meeting regulatory requirement on capital. It needs to be remembered that the government had already announced infusion of Rs.3800 crore into IOB in August 2019 and this is just an additional capital infusion of Rs.560 crore. In exchange for this contribution by the central government, IOB will offer preferential allotment of equity shares (Special Securities / Bonds) of IOB.

Other than IOB, the government has also approved infusion of Rs 2,142 crore in UCO Bank in line with what was announced in August this year. There is not increase in the allocation compared to the amount announced in August this year. It may be recollected that both these banks; UCO Bank and IOB, are currently under the Prompt Corrective Action (PCA) framework of the RBI. Is it worth investing in IOB and UCO at these prices?

Let us look at the financials first. IOB reported widening of net loss to Rs.2,254 crore for September quarter. At the same time, the gross non-performing assets (NPAs) of IOB stood at 20% of gross advances in the September quarter. However, net NPAs had come down 450 bps to at 9.84% due to aggressive provisioning.

In short, smaller PSU banks are under a lot of stress and till the time the gross NPAs are brought down and credit picks up, there is no point in buying into these stocks. Also, the capital infusion story is already factored into these stocks in August itself and there is no new impetus from the financials. You must look only at sound PSU banks like SBI or BOB at this point of time.