Analysts, however, say upsides in these shares could be limited because of rising credit costs and rich valuations.
Shares of UCO Bank soared 15.23% to an all-time high of ₹60.65.
Indian Overseas Bank jumped by 12.02%. Punjab and Sind Bank, Central Bank of India, Bank of Maharashtra, and Indian Bank rose by 3-7%. Canara Bank and Bank of Baroda gained around 1%. Bank of India slumped 8% and State Bank of India declined over 1% after their third quarter results disappointed the street. The Nifty PSU Bank index fell 0.42% on account of the weakness in shares of the bigger PSU lenders. The benchmark Nifty declined 0.38% on Monday.
“Since the budget, the yield outlook has improved due to lower projection of fiscal deficit,” said Kaitav Shah, Banking Analyst, Anand Rathi Institutional Equities. “PSU Banks will benefit more from lower yields, and it also leaves room for improved credit deposit ratio.”
Shah is most bullish on SBI and Bank of Baroda among PSU lenders.Shah said that the inclusion of Indian bonds into the JP Morgan Index in June is another positive trigger for yield softening.PSU Banks are slightly better placed in terms of loan deposit ratio compared to their private peers, but that need not translate into gains in their share prices, said fund managers
“The treasury gain component due to reduced fiscal deficit projections could help the sector but is likely to have a temporary impact,” said Christy Mathai, Fund Manager, Quantum Mutual Fund. “The current valuations capture most of the upside potential and the normalization of credit cost would impact the sector negatively.”
From the last week of October—since when the current broad market rally began–, the Nifty PSU Bank index has gained 38% as against the 13.8% upmove in the benchmark Nifty.
“The earnings growth in Q3 has been less than healthy for PSU banks, as the rising cost of funds impact has not been as much as private banks and also due to lower credit provisions,” said Shah. “Over a longer time frame, the fundamentals will catch up with the PSU Bank stocks.”
Rising credit costs mean share valuations are no longer cheap.
“The normalization of credit cost over the next year along with the incremental margin pressure could take away from the return on assets,” said Mathai.
(You can now subscribe to our ETMarkets WhatsApp channel)
Download The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price