Banking PSU stocks made a brave comeback on Monday after succumbing to losses Friday following the Union Budget's ignoring a long-standing demand by the sector on FDI limits.

In fact, the recovery was impressive, as reflected in - Punjab National Bank (PNB) (up 10% to Rs 92.15), Bank of Baroda (up 7.8% to Rs 82), Canara Bank (up 7% to Rs 66.50), Union Bank of India (up 5.4% to Rs 25.10), Andhra Bank (up 4.9% to Rs 28.60), Oriental Bank of Commerce (up 3.7% to Rs 59.80), Dena Bank (up 3.8% to Rs 13.55), Syndicate Bank (up 3% to Rs 16.80), Bank of India (up 2.8% to Rs 36.65) and State Bank of India (up 2.5% to Rs 293).

Volumes were substantial, too. Punjab National Bank (780,000 shares on BSE) and Canara Bank (740,000 shares on BSE) topped the volumes. Over the last few trading sessions, Alliance Capital Mutual Fund was believed to have mopped up shares of PNB and Canara Bank .

Banking PSU stocks witnessed a sell-off on Friday after the much-longed for hike in foreign investment ceiling from the existing 20% level did not materialise in the Budget. On Friday, State Bank of India (SBI) plunged 5.6% to Rs 285.75. Other public sector banks including Andhra Bank (down 7.31% to Rs 27.25), Bank of Baroda (down 5.49% to Rs 75.80), Canara Bank (down 5.56% to Rs 62.05), Union Bank (down 4.61% to Rs 23.80), Dena Bank (down 4.04% to Rs 13.05), Punjab National Bank (down 3.36% to Rs 83.40), Oriental Bank of Commerce (down 1.79% to Rs 57.65) and Corporation Bank (down 2.78% to Rs 137.90) declined as well.

SBI was the hardest hit, in view of the fact that the bank's FII ceiling of 20% has already been reached. A hike in FDI (the current 20% FDI ceiling includes FII investment as well) limit from 20% to 49% would have provided room for more FII investment in the bank. In fact, the SBI stock had surged (albeit amid volatility) in the run-up to the budget on expectations that the FII ceiling in the bank would be relaxed. For other public sector banks like Bank of India, Bank of Baroda, Corporation Bank etc., the hike would not have meant much as there is a lack of FII interest in these banks as is evident in their foreign shareholding ratios, which range from as low as 0.5% to 5%.

However, banking analysts maintain that the budget is undoubtedly beneficial for the banking sector at large. For one, the voluntary gilts buyback offer is a win-win for both banks as well as the Centre. On the other hand, it shall help banks to clean-up their balance sheets by allowing them to earmark profits earned from such sales towards NPA provisions particularly when profit from such sales shall be exempted from tax. The Centre, itself, will be able to take advantage of falling interest rates. However, banks will have to exert prudence in deploying these funds.

A large proportion of holding by banks of Central Government domestic debt, contracted under the high interest regime of the past, is thinly traded. With the softening of interest rates, ordinarily, such loans should command a premium over their face value. In effect, though, banks are often unable to encash this because of limited liquidity. The government, therefore, now proposes to offer a buy back of such loans 'entirely on a voluntary basis' from banks that are in need of liquidity, or of encashing the premium for making provisions for their non-performing assets thereby improving their balance sheets, or otherwise. The premium to be offered will be set on a transparent basis. If the banks declare the premium received as business income, for income tax purposes, they will be allowed additional deduction to the extent such income is used for provisioning of NPAs.

Moreover, extension of the benefit of Sec. 72A of Income Tax Act to nationalised banks by allowing any banking company to merge with a nationalised bank with consequential tax benefit will enable public sector banks to embark on mergers and acquisitions in order to consolidate their operations and improve efficiency. Few bank PSUs having high CAR are already open to the idea of such inorganic growth.

Another booster for public sector banks is the announcement by RBI to cut interest rates on saving banks account from the existing 4% to 3.5%. The cut in saving account interest rates will straightaway add to their bottom line. Soon after the budget, RBI announced the cut in saving interest rates.

Further, with a view to maintain its present momentum of growth, it is proposed that interest deductible under income tax up to Rs 1,50,000, for construction or purchase of a self-occupied house property, be continued. This is also a positive for banks which are focussing on the retail segment.

Some of the negative factors for the industry include an increase in service tax from the present 5% to 8%. The industry had demanded the abolition of 5% service tax.

The industry had asked for total removal of dividend tax both in the hands of shareholders as well as banks, given the high dividend payout made by banks. However, there is now a dividend distribution tax of 12.5%.

One encouraging recent trend in banking is that credit offtake is going up.