2021 could be a very good year for PSU banks assuming that credit costs are contained, says Dipan Mehta, Founder & Director, Elixir Equities.

What is the outlook on SBI? Does it look sustainable in its move? Also should one be very selective in PSU banks?
By and large, PSU banks came with a very good set of numbers and it could be a bit of a mirage because they still have to undertake a lot of settlement and restructuring requests which may come through until December of 2020. So to that extent, their NPA and credit costs have not yet got crystallised, but it does appear that at least the PSU banks are far better positioned to handle the surge in NPA post Covid than we thought earlier a month or two ago.

What has benefitted PSU banks is a surge in low-cost deposits and that has expanded their net interest margins and provided them with even further pre provisioning operating profits to take care of any surge in credit cost. Perhaps PSU banks are very well placed to come out of this crisis relatively un-impacted, all subject to what the quantum of NPAs are in January when the entire restructuring period is over and done with. They are available at extremely attractive valuations, including SBI.

A whole host of PSU banks are going at 0.3-0.4 times price to book. These are distressed valuations and they need a nice trigger in terms of better quarterly numbers for December quarter and March quarter with some form of reforms coming through some packages. If there is a trigger in the PSU banks, then you could see a superb rally coming through because the gap in valuation between PSU and private sector banks is at the highest ever and there is a great deal of comfort when it comes to PSU banks. Of course they cannot pay dividends right now, but once they start paying dividends they will again be offering a good dividend yield as well.

All the consolidation within the sector is over and done with, some issues which were there with succession planning, especially in SBI, are over. I would be looking at PSBs quite closely, see what their NPAs are post December restructuring period and then maybe try and make allocation to PSU banks. 2021 could be a very good year for PSU banks assuming that credit costs are contained.

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