Stocks such as Punjab National Bank and Bank of India have risen more than 50 percent each this year while shares of Central Bank of India, Bank of Maharashtra and Union Bank of India have jumped more than 40 percent each.
Healthy growth in advances, net interest income (NII), reduction in gross NPAs and strong growth in profitability are some of the factors that boosted PSU bank stocks. Moreover, investors eagerly bought these stocks because of their attractively low valuations.
“Share prices of public sector banks (PSBs) were driven by healthy growth in advances, strong growth in net interest income (NII), reduction in gross non-performing assets (GNPA), improvement in the restructuring portfolio and robust growth in profitability,” Vijay Gour, Analyst – BFSI at Choice Broking pointed out
Abhishek Jain, Head of Research at Arihant Capital pointed out that the build-up in PSBs can be attributed to several factors, including low valuations and improving asset quality.
“These banks have been trading at attractive valuations, making them attractive investment options. Moreover, the consistent performance of companies like Bharti has fueled optimism, with expectations of investment sales following elections, starting with IDBI Bank,” Jain said.
“Another decisive factor contributing to their success has been the improving asset quality. The market’s growing belief that the worst phase of asset quality issues is over has played an important role. This positive sentiment is expected to continue, with the cycle of quality assets are likely to remain favorable in the coming quarters,” Jain said.
Shreyansh Shah, research analyst at StoxBox pointed out that the main reasons for PSU banks witnessing momentum during 2023 are the results seen in their operational efficiency after the merger that took place in 2018-19.
“The minimal intervention of the government has resulted in a significant improvement in most of the asset quality of the PSBs. The management of the PSBs have made significant structural changes in their business strategies and are now focusing more on the granular expenditures, which have greatly improved their net interest income over the years,” Shah said.
“Also, the recent RBI circular on risk weights has marginally impacted PSBs as they have more than required capital at their disposal which would help them gain market share in unsecured and NBFC segments,” said Shah.
On valuation, Shah pointed out that the P/B (price-to-book value) metric is still attractively placed alongside healthy return ratios.
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The way forward
Experts are positive about the prospects of public sector banks for the coming year.
Gour expects PSU banks to do well in the long term due to growth in advances and reduction in GNPAs.
“We expect that credit growth will be driven by personal loans, services and SMEs. Improved financial profiles of the banks are also expected to support their credit growth. We do not expect significant changes in interest rates and inflation in the near term. However, the asset quality of the agricultural portfolio should be monitored for Q3FY24 and Q4FY24 due to erratic monsoon in 2023,” Gour said.
Jain believes if the trend of improved asset quality and performance is sustained, PSU banks could maintain their upward trajectory in 2024, potentially leading to continued market interest and investment in these stocks.
Shah is positive about the PSB stock.
“Although banks are facing the brunt of NIMs (net interest margins), we believe they would still post decent profitability in the medium term due to high credit growth and healthy cross-selling,” Shah said.
A brokerage firm Motilal Oswal Financial Services rates the top six PSBs under its coverage to report PAT of ₹1.5 lakh crores and ₹1.7 lakh crore in FY25 and FY26, respectively, while sector RoA (return on assets) and RoE (return on equity) may improve to 1.2 percent and 17.9 percent, respectively, by FY26E.
The brokerage firm pointed out that several PSBs have raised capital from the market and consolidated their capitalization levels, which will enable healthy balance sheet growth, especially as the capex cycle picks up after the general elections.
“We believe that continued and consistent performance on return ratios and a favorable macro environment can drive further re-rating of the sector. We are introducing FY26E and forward target prices for our PSBs coverage universe. We are thus revising our target price for State Bank of India ( ₹800), Bank of Baroda ( ₹280), an Indian bank ( ₹525), Union Bank of India ( ₹150), Canara Bank ( ₹550) and Punjab National Bank ( ₹90),” said Motilal Oswal.
State Bank of India, Bank of Baroda and Canara Bank are Motilal’s top picks.
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Disclaimer: The views and recommendations above are those of individual analysts, experts and second-hand companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 21 Dec 2023, 14:25 IST