All PSU banks gain in 2022! Should you buy more or sell now?

Nifty PSU Bank is the best-performing index among all NSE indices in 2022. The index has surged 52 percent during the year as against a 19 percent rise in Nifty Bank and a 5 percent gain in benchmark Nifty.

The PSU Bank index has also been hitting new highs in the last few sessions and has surged 21 percent in the past one month and 11 percent just in November on the back of strong earnings for the July-September quarter (Q2FY23).

All stocks in the Nifty PSU Bank index have also turned positive for the year.

On a YTD basis, Bank of Baroda (BoB) has surged the most, up 100 percent followed by Indian Bank, up 95 percent. Union Bank (UBI) rallied 68 percent, Canara Bank soared 54 percent, and Bank of India (BoI) advanced 46 percent.

Other public sector lenders including Bank of Maharashtra (BoM), SBI, Punjab National Bank (PNB), UCO Bank, Punjab & Sind Bank, J&K Bank, Central Bank of India (CBI) and Indian Overseas Bank (IOB) gained between 5 and 30 percent in the period.

In the last 1 month, Union Bank was the top performer, up 58 percent followed by BoI, up 55 percent. J&K Bank, UCO Bank, BoM, Indian Bank, Canara Bank, Punjab & Sind Bank, IOB and CBI also jumped between 20 and 35 percent.

The public sector banks have posted strong earnings in Q2 due to the acceleration in credit growth, improvement in asset quality, rise in loan growth, and decrease in provisions.

"Public Sector banks (PSBs) have been on the recovery path over the past few years with a key highlight for the majority of PSBs being the sharp improvement in asset quality and a healthy provision cover. Thus, healthy asset quality, benign credit costs, pick-up in credit growth, and improving operational profitability should collectively aid return ratio improvement for PSBs. This should help narrow the valuation gap between PSBs and private banks to some extent. Amongst the PSBs, we like SBI," said Dnyanada Vaidya, Research Analyst, Axis Securities.

In the first half of the current financial year, the cumulative net profit of all public sector banks increased by 32 percent to ₹40,991 crore.

Finance Minister Nirmala Sitharaman on Monday said the government's efforts to reduce bad loans were yielding results with 12 public sector banks reporting a 50 percent jump in combined net profit at ₹25,685 crore in the second quarter ended September.

Outlook

Vinit Bolinjkar, Head of Research, Ventura Securities believes that PSU banks have rebounded given a huge valuation discount. Also, unlike the last cycle, PSUs have not resorted to reckless lending but have been quite conservative in their approach, he noted. Most of the PSUs have high provision coverage and have a clean balance sheet this time, however, the concern remains on their growth given they have been losing market share to private banks and now will also be vulnerable to fintech, said the expert.

Bolinjkar's top pick is SBI (1.3x FY23 P/B). He also likes Bank of Maharashtra among regional PSBs given that the bank has healthy PCR, a clean balance sheet and a cheap valuation (0.9x FY24 P/B).

Satish Menon, Executive Director at Geojit Financial Services, said, "A deep discount in PSBs valuation and improvement in quarterly results reflecting growth in business, buffer provision, and asset quality led to the rally. The GNPA of PSBs has more than halved from the peak of 14.6 percent in FY18. A huge valuation gap between private and public sector banks created the arbitrage opportunity. However, the gaps have rapidly narrowed, limiting the upside in the short term. While on a long-term basis re-rating is expected to extend. SBI and BoB are our top picks among PSU Banks."

Brokerage house Bank of America Securities (BofA Sec), in a recent report, said," State-owned banks are now guiding for steady growth - in line with or better than the system. PSBs' aggregate loan growth in FY22 improved to 8.8 percent (versus private banks' 16 percent) - the highest since FY14. More importantly, growth across PSBs was more broad-based across segments."

Among public banks, BofA re-iterates its positive view on SBI and Bank of Baroda as it expects valuation re-rating on continued improvements in the growth-ROE profile. It added that these PSBs are also likely to benefit more from capex cycle.

Mohit Batra, Founder & CEO, MarketsMojo, also notes that the public sector has produced some of the best-performing banks.

"This is a significant relief for the investors of public sector banks, as public sector banks have underperformed significantly over the past few years. However, according to our sector assessment, the credit deposit ratio has increased slightly. As a result, banks will be forced to raise deposit rates. This could result in the Net Interest Margin (NIM) being under pressure," he explained.

According to Batra, historically, two phenomena have been observed when the interest rate has increased. "First, the growth rate of advances decreases. Second, NPA levels increase. These two are possible, which means that all positive outcomes are priced in the Bank Nifty at this time," he said.

His good buys are from public sector banks — Bank of India, Union Bank of India, and Bank of Maharashtra.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.