Despite 22% jump in 3 months, analysts see more upside in Nifty PSB index

Among individual shares, Bank of Baroda, Canara Bank, State Bank of India, Indian Bank, and Union Bank of India soared between 21 per cent and 34 per cent during the period

The Nifty PSU Bank index advanced 2.7 per cent on the National Stock Exchange (NSE) on Thursday, even as the benchmark Nifty50 index fell by 0.47 per cent. Over the past three months, shares of public sector banks have staged a smart outperformance on the bourses amid a pick-up in the market momentum, and improved economic outlook. 

The Nifty PSU Bank index has jumped 21.5 per cent during the period, as against a 9-per cent rally in the 50-pack index, ACE Equity data shows. Among individual shares, Bank of Baroda, Canara Bank, State Bank of India, Indian Bank, and Union Bank of India soared between 21 per cent and 34 per cent.

Going forward, analysts expect the outperformance in the pocket to continue as fundamental concerns around the sector recede.

G Chokkalingam, founder and chief investment officer at Equinomics Research, for instance, sees another 10-15 per cent upside in select PSBs given attractive valuation, and better growth outlook.

“A lot of PSBs are trading at discounted, or around 1x  price-to-book value (P/BV) multiple. Given that these PSBs will be merged going ahead into eight large banks, this kind of discount is unwarranted,” he said.

Last week, a Reserve Bank of India (RBI) report reiterated that the government's approach to “gradually privatise” PSBs would result in better outcomes. READ HERE

Moreover, as per a Bloomberg report, the government is mulling to sell at least 51 per cent of state-backed IDBI Bank. A panel of ministers, the report said, will make the final decision on the structure of the deal, and the government and Life Insurance Corporation (LIC) will formally seek to gauge buyer interest as soon as the end of September.

Siddharth Khemka, head of retail research at Motilal Oswal Financial Services, too, said the rally in PSBs could continue as there is a lot of value buying happening in the markets. 

“Fund rotation within sectors is happening on a fortnightly basis, and PSBs is a pocket where there is a lot of interest due to valuation comfort, and greater linkages to economic upswing,” he added.

In the first fortnight of August, 2022, bank credit growth stood at 14.5 per cent year-on-year, a marginal improvement from 14 per cent YoY growth in the previous fortnight.

According to Nirmal Bang Institutional Equities, large corporates have shifted to banks, as opposed to other forms of borrowings, for their credit requirements over the last six/seven months.

“Corporates are considering long-term borrowing instead of short-term loans due to the rising interest rate scenario. Besides, they are also switching from overseas borrowings to borrowing domestically as global liquidity tightening and volatile currencies have made overseas borrowings expensive,” it said in its fortnightly macro-update report. External Commercial Borrowings (ECB) declined by 20 per cent YoY in the June, 2022, quarter, according to media reports.

This double-digit pick-up in credit growth, analysts say, bodes well for PSBs as they find it difficult to compete with private banks during low (credit) growth phases.

Earnings expectations

That apart, hopes that inflation might have peaked in India has brightened prospects of better income growth, analysts said.

This is because both, public and private banks, took a massive hit on their treasury income in the April-June quarter of fiscal 2022-23 (Q1FY23) as bond yields hardened amid aggressive rate hike fears. However, with the rate of price rise cooling off, markets expect the central bank to be less hawkish over the next few quarters.

Moreover, PSBs have been reporting improved asset quality over the past two quarters. This, along with higher other income, will support earnings growth for state-owned banks, analysts said.

According to ICICI Securities, gross non-performing asset (GNPA) ratio for banks in its coverage declined in the range of 6-35 basis points (bps) with average drop being at around 10 bps. Even on an absolute basis, GNPA declined around 1 per cent QoQ, and 12.1 per cent YoY for the banking sector, it said.

“Momentum in credit growth and operational performance is expected to continue ahead. Firing up unsecured books could aid in initial quarters of FY23, while recovery in corporate credit offtake may revive credit growth from the second half of the current fiscal (H2FY23). Gradual transmission of rate hike will offset rising competitive intensity on deposits. Deposit mobilisation and thus trend in credit-deposit (CD) ratio needs to be watched,” it added.