The Nifty PSU Bank index stole the market’s thunder, as it zoomed to the tune of 11% in the past week to reach 3781.90 points! This move was propelled by the pleasantly surprising results posted by index heavyweights, Bank of Baroda, Canara Bank and the State Bank of India at the beginning of this week.
The Nifty PSU Bank index outshone the benchmark indices so far this year. It rose by 49.51% year to date (YTD), which is significantly higher than a 4.77% rise in the Nifty 50 index. In fact, the Nifty PSU index dazzled in front of the Nifty Private Bank index which increased by 17.73% YTD.
Indian Bank, Union Bank of India, Canara Bank, Bank of Baroda, Bank of India, and SBI rose to the tune of 29-97% this year. All of this makes us wonder what made Psu Banks perform better than their counterparts.
Historically, PSU Banks have been plagued by poor asset quality due to their reckless lending. In fact, they reported a high loan growth of ~17% from FY10-14. Hasty lending, economic slowdown & RBI’s asset quality review opened a Pandora’s box of gross NPAs. However, the sector has witnessed a gradual improvement in gross NPAs since FY18. They are down to about ~6% levels in FY22.
PSU banks have relatively performed better than their private peers as far as corporate slippages are concerned. Once considered troublesome, their corporate book is pushing their loan growth.
There has been a pick up in corporate credit due to a high public, and private capex and increasing utilization of working capital limits. PSU Banks have a large pie of corporate loans in comparison to private banks, hence they are set to benefit the most.
Analysts say that improving asset quality, pick-up in loan growth, better capital adequacy, and lower provisions are expected to aid the return ratios of PSU banks. Further, the market has already started discounting these positives which have resulted in an improvement in their valuations.
“The earnings outlook for PSBs continues to look good, led by an improvement across margins, operating profitability, and credit costs. The SMA pool remains benign, which coupled with limited slippages, would aid in sustained/continuous reduction in credit costs,” said Motilal Oswal Financial Securities.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said that PSU banks posted better-than-expected profits in Q2, led by loan demand, better asset quality, and rising margins. He added that credit growth remained positive.
“PSBs are underowned. More steam left in the stocks despite the recent rally. The valuation gap between private banks and PSB stocks will narrow,” added VK Vijayakumar.
Analysts believe that public sector banks may continue their outperformance on a healthy outlook, and on the back of multiple positive triggers.
“The weekend saw the results of two major PSUs – SBI and BoB. Both reported strong earnings, with strong operating metrics. These fundamental metrics are likely sustainable for the two major banks, and we expect re-rating,” Hemali Dhame, associate vice-president – research, Kotak Securities said.
She added that even though we saw a run-up in prices, she expects those strong fundamentals will improve the profitability of these stocks and gradually improve the probability of a re-rating.
Written by Simran Bafna
The post Why are Psu Banks Performing better than private banks? Will they continue to do better? appeared first on Trade Brains.
