Today, there has been sharp rise in stock prices of PSBs due to following reasons:

1. Global markets as well as Indian markets are sharply higher. However, such rise cannot happen every day. There will be profit booking at every rise.

2. Wide perception that worst is over for PSBs, hence, bottom fishing.

3. Short covering

4. Presentation by BoB management which has painted a very rosy picture but NOT GIVEN GUIDELINES FOR Q4. If bank management is so optimistic, should have give guidelines of Profits expected/NPAs/Provisioning for Q4.

5. Statements by our Finanace Minister which are only political in nature

Our Take:

1. Worst is not over for PSBs. Q4 can be worse than Q4

2. Even if PSBs clean up their Balance Sheets in next 2 quarters, what is the road ahead?

3 In Q3, there is credit degrowth. Looking at various stalled projects, credit growth in Q4 unlikely. Unless govt undertakes implementation of stalled projects on war footing, credit offtake will not rise

4. Out of total NPAs, nearly 80% are from BIG accounts. And, it may not sound believable but in reality, security with banks of all these BIG NPAs may not be more than 10% of the exposure. Hence, these NPAs can be recovered ONLY if there is substantial improvement in working of steel/power/commodity sector and it may take several quarters

5.BoB has said that no fresh capital infusion required and bank will raise funds through sale of non core assets. Easier said than done, particularly for a PSB

6. Finally, Bad Bank (where govt plans to transfer all NPAs of PSBs) is a BAD IDEA. Will give clarity/details shortly

Today's rise in stock prices of PSBs appears irrational exuberance. Those who have already gone SHORT are advised not to panic, hold on to their positions. These stocks will cool down ( as it happened in our earlier calls of Maruti etc)