After a spectacular 2022, the PSU bank index has underperformed benchmarks in this calendar year so far. The Nifty PSU Bank index has gained only 2.6 percent in 2023 YTD as against a 7 percent jump in benchmark Nifty.
Meanwhile, the index surged 71 percent in 2022.
Unlike the benchmarks and most indices, the index has failed to hit its record high this year.
Nifty PSU Bank is around 4 percent away from its all-time high of 4,640, hit in April 2011 and 3.4 percent away from its 52-week high of 4,617, hit in December 2022.
However, in the last 1 year, the index has rallied around 70 percent versus a 19 percent rise in benchmark Nifty.
The index has given positive returns in 4 of the 7 months so far in this calendar year. It has advanced around 8 percent in July till date after adding 2 percent in June. However, it fell 3.3 percent in May. Meanwhile, the index jumped 12 percent and 1.5 percent in April and March, respectively. But it was down 8.7 percent and 7.2 percent in February and January, respectively.
Constituents
Among the 12 constituents in the Nifty PSU Bank index, 6 or 50 percent of the stocks were positive in 2023 YTD while 6 were negative in this period.
Bank of Baroda was the top performer, up over 9.7 percent, followed by Indian Bank, Punjab National Bank and Bank of Maharashtra, up between 3 and 9 percent each. Union Bank of India and Canara Bank are also positive this year but flat, up around half a percent each.
Meanwhile, Indian Overseas Bank was the top loser, down 17.3 percent in 2023 YTD, followed by Bank of India and UCO Bank, down around 11.5 percent and 9 percent, respectively. CBI, SBI and Punjab & Sind Bank also fell between 2 and 4.5 percent each.
Is this the right time to buy PSU bank stocks?
Vinit Bolinjkar, Head of Research - Ventura Securities, believes that the overall underperformance in the Nifty PSU Bank stocks for 2023 is attributable to various factors, mainly weak global demand and monetary tightening by the central bank. Moreover, the recent Adani-Hindenburg saga raised concerns over the Adani conglomerate’s debt exposure even though the majority of the debt was secured by Adani’s cash-generating asset, he added. However, he noted that the outlook for PSU banks still remains strong due to expected credit growth in the economy, improving ROA (return on asset) and stable asset quality.
The expert said PSU banks are set for a possible re-rating in the near term. His Top picks are: SBI, Bank of Baroda, Bank of Maharashtra.
According to Umeshkumar Mehta, CIO, SAMCO MF, the Nifty PSU Bank index was a one “cigar-puff ” investment opportunity for investors back in 2022.
"The momentum it witnessed was mainly because of the IBC regulations which enabled cleaner books and improved NPLs for these public banks. However, maintaining this same degree of consistency in numbers year after year is a tough task. Therefore, the sentiment around PSU banks has changed in 2023. Another reason for the lack of steam in PSU Banks is the populist sentiment around the Elections expected the next year which isn’t in strong favour of PSU banks. Both these factors could be reasons for a poor show by PSU banks this year," he explained.
Suman Bannerjee, CIO, Hedonova, stated that he believes whatever goes up, comes down.
"PSU banks went up a lot in 2022 and now the momentum is fading. I have a weak outlook for the PSU bank index in the long run. As India’s socio-economic demographic changes and more people move out of the middle class to the upper middle class, there’s going to be a preferential shift from PSU banks to private banks. My top picks would be SBI, Canara Bank, IDBI Bank," he said
Santosh Meena, Head of Research, Swastika Investmart, noted that the Indian banking system is currently in a healthy state, characterised by low Non-Performing Assets (NPAs) and strong loan growth. Moreover, banking stocks, including PSU banks, still offer attractive valuations, providing further comfort to investors, he added.
"The recent business update from the Bank of Maharashtra is particularly encouraging, as it highlights solid growth in both deposits and loans. The return of 2000-rupee notes to the system in terms of deposits helped PSU banks with liquidity. This, in turn, has positioned them favorably for potential growth and profitability in the upcoming quarter. Overall, the combination of favorable market conditions, strong fundamentals, and positive business updates suggests a promising outlook for PSU Banks, raising expectations for another robust quarter ahead," he suggested.
Nirav Karkera, Head of Research at Fisdom, also pointed out that PSU banks continue to exhibit growth prospects. The growth trajectory may appear to have flattened this year, but it is only relative to the previous year’s spectacular performance, he said. He expects public sector banks to continue delivering strong earning performance, but the same may not be as visible in stock prices which seem to have priced in such potential to a great degree. The index is still expected to inch upward at a healthy pace through the year, added the expert.
Within the index, he favours Canara Bank and Bank of Baroda.
Canara Bank’s asset quality has been improving gradually with higher PCR. Earnings have been following the expansionary path as provisions lower. Other income, including fee income, has picked a meaningful pace. Overall outlook on the bank’s business appears promising, he explained.
Bank of Baroda has been witnessing business growth at a steady pace. The bank’s overall loan book registered healthy growth with a notable uptick in retail loans; specifically personal and automobile segments. Asset quality is improving. The bank continues to witness margin expansion at a reassuring pace, he said.
