As compared to Monday’s closing level of 5,217, Nifty PSU Bank is just 3% away from the closing peak of 5,375.8 touched in November 2010.
The recent rally in the barometer has pushed the 14-day RSI above 70. The index is also trading above all its moving averages.
“A pullback seems likely in overly stretched stocks like PNB, Bank of India, IOB and Central Bank while Canara Bank, Bank of Baroda, Union Bank and Indian Bank are poised to attract buying interest,” Anand James of Geojit Financial said.
In the last one year, 8 government-owned banks have more than doubled investor wealth. UCO Bank has been the top gainer in the list with an unstoppable rally of 270%. Punjab and Sind Bank has also grown over 3 times while Central Bank of India, Bank of Maharashtra, Indian Overseas Bank, Union Bank of India, Bank of India and Indian Bank are other multibaggers in the list.
“Public sector banks’ investments in government and other approved securities are currently significantly higher than the statutory requirement. Recent regulatory changes relating to investment book classification are likely to significantly reduce the requirement for public sector banks to make marked-to-market provisioning,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers, explaining the reason behind the recent rally.
Since late 2020, the outperformance of public sector banks versus bellwether indices has been double that of non-bank public sector listed companies.“The outperformance of public sector banks versus non-banks appears to indicate that investors’ perception of public sector banks have improved more than that of other public sector entities. Consolidation of public sector banks, increased autonomy in business decisions, significant improvement in asset quality of public sector banks, and improved operational performance of these banks are all important factors in improving investor sentiment towards these entities,” Hazra said.
Even after the sharp rally, most analysts do not find the valuations of most PSU banks in the excessive category.
“Most PSU banks will probably deliver 1% ROA over the next 12 to 24 months, which used to be their historical track record and valuation is still around 0.6 to 0.8 times PB one-year forward earnings. This means these are still reasonable. And I would not say that there is any irrational exuberance in that space yet,” said Chandraprakash Padiyar, Senior Fund Manager, Tata MF.
In the June quarter, PSU banks impressed with better-than-expected NIMs/PPoP and stable asset quality. Indian and Canara Bank saw flattish NIMs QoQ, Union Bank saw an uptick QoQ while SBI and BoB disappointed with 26-27bps QoQ decline.
On aggregate basis, gross slippages at PSU banks (1.3% annualised) remain lower than private peers (1.9% annualised).
However, deposits growth continues to lag credit growth by a wide margin, primarily driven by contained deposits growth at PSU banks.
Overall deposits for an aggregate of 30 banks entailing over 90% of the system grew by 13.6% YoY and 1.8% QoQ.
A part of the enthusiasm in ‘sarkari’ bank stocks is also being attributed to investor love for PSUs.
“In the longer term, I do not recommend that people should keep on buying PSU banks at higher valuations because from this quarter or next quarter onwards, we will start seeing some uptick in NPAs and a squeeze in margins which was not there for the last two quarters,” warns investment advisor Sandip Sabharwal.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)