If consensus estimates are to be believed, the markets are headed for a cyclical uptick in FY14, driven by rate cuts. With economic growth bottoming out and corporate profitability stabilising, it would be fair to assume the banking system would be a beneficiary of this trend. Banking analysts, however, don't expect this to happen, the recent rate cut notwithstanding. So, even if public sector banks look attractive, it could be a "valuations trap", rather than a "value buy". There are several reasons behind the negative stance the market has on the banking sector, especially public sector banks.
From FY14, banks will have to hike provisions for incremental bad loans from the existing 2.75 per cent to five per cent. This will lead to a rush to restructure stressed assets, Ambit's analysts believe. "Such enhanced provisioning could potentially impact system return on assets by 15-20 basis points," they add. A significant portion of loans to thermal power projects is expected to turn into non-performing loans or come up for restructuring, analysts believe. Realising the nature of the problem (lack of fuel availability), the regulatory authorities have given concessions on classification of stress in the infrastructure space. The pain in the power sector will impact not just PSBs, which have on-balance sheet exposure to the sector, but also private sector banks (which have off-balance sheet exposure to the sector).