Its not BOI alone which is going down.

All PSU Banks are going down.

The following developments are not in favour of PSU Banks, where 85% of income come from Interest alone..

1.CRR rate hike.

2.Deposit rate hike.

3. Stock market going down.

 

Due to CRR  hike Banks have to keep more money with with RBI. In order to get more money, Banks are accepting deposit at a very high rate. Though banks are offering around 10% to public, bulk deposits for 1 year is accepted at even 11.2% today from Corporates. So banks have to hive off a lot of interest, which will have an adverse effect on profitability.

 

Banks have increased the lending rate also (PLR). But many of the existing Banks loan are on Fixed rate. They are not affected by the rise in PLR. Banks can not charge more intt on these loans. So Banks loose, till all the fixed intt loans are liquidate.

 

In the yearending The Banks have to make provision for all the securities which are marked to market. Since the stockmarket has gone down and the intt rate on Govt Bonds have increased, the Banks have to make provision for all the notional losses on securities (Shares and Bonds).

 

The net effect you can understand. The profitability will be greatly affected for PSU Banks. Effects will not be that severe in Q4-2007 but after that, it will be much more severe.

 

Further to that the PSU Banks are always in competition with each other, for increasing business. They want to show higher % of growth in deposits and advances. For acheiving this mostly they accept deposits  at a higher rate of intt and give advances to corporates at lower rates.

 

No doubt all the above does not speak of a good future for PSU Banks.

 

Its high time that the top Mangament team of PSU Banks shouls realise that "Big is not better, better is always better."

 

All I can say is,I am not optimistic about the PSU Banks in the short term.

 

To be very candid, I started my career in stock markets with a banking stock called oriental bank of Commerce. Bought at average of 37 and disposed the same at an avergae of 250 odd levels more than 3 years back. Actually there were several in which I ventured including Vijaya, Union, BOI and SBBJ. And trust me prices were really pathetic then. Its during the period of hopelessness one should get into them. Something like a SBBJ, we managed to get it at 303 for a 100 Rs. paid up share and made more than 10 times and ate at least 3 dividends and the stock adjusted for dividend will become free with just one more dividend. The only banking stock which I am at a loss in at the moment is Allahabad bank, and that too quite nominal. I picked it up for yield but its stock market prices puzzle me sometimes. Actually, I try to get banking stocks, especially when their dividend yields adjusted for tax offers me a better return compared to time deposits. So when I got into Allahabad Bank, that was the case but subsequently the interest rates on TDs moved up and hence the prices have come down. Now I have got to recalculate my entry levels again.

 

Candidly speaking, I am not quite delighted with my banking experience at Private Banks. I beleive foreign banks a lot better when it comes to premium banking and for ordinary banking, PSU banks quite reasonable. So, the mix doesnt do justice to either. Its my personal opinion, and nothing to do with stock prices. So, applying buy what you see analogy I try to avoid them even though their fee based income is moving northwards. Reiterating again, its a personal opinion.

 

PSU Banks are having less customer fancy and hence low PE. The dividend yield is quite high and so less risky during recession. Recently the prices also have come down by 20-40%, which is factored with the poor outlook due to recent developments. Till 2003,  PSU Bank stocks were neglected due to Govt apathy and so the prices were abysmally low. Anybody who have purchased stocks of the big PSU Banks have multiplied their money.

 

But now things are different now. Getting a multibagger from the present  PSU Banks, with the present outlook is no where in sight. Yes, dividend yield will be definitely high than other stocks, but we have to be satisfied with that for the time being.