The year 2022 belonged to PSU bank stocks.
Most PSU bank stocks clocked strong gains in the year, beating the benchmark Nifty by strong margins. While Nifty has risen nearly 5 percent this year as of December 27, the Nifty PSU Bank index has soared 67 percent.
Stocks such as UCO Bank, Bank of Baroda, Indian Bank and Punjab and Sind Bank have surged more than 100 percent each.
What scripted their bull run?
The major factor behind the sharp gains of PSU banking stocks was their cheaper valuation when their fundamentals were improving significantly.
As Arpit Jain, Joint MD of Arihant Capital pointed out, 2022 was the year of growth for most PSU banks after the consolidation in their asset quality showed stronger balance sheets.
Moreover, investors have realised the value in PSU stocks as some of the stocks were available for as low as 0.3-0.4 times their book value, Jain underscored.
Brokerage firm ICICI Direct believes many factors supported the rise in PSU banking stocks.
"After the phase of significantly higher GNPA, treasury MTM losses, lower capital and sub-par growth, there has been a turnaround with comfort on asset quality, reversal of treasury losses, credit growth pick-up and just adequate capital position for most of them. Despite the decent rally, the valuation still looks reasonable for PSU banks," said ICICI Direct.
PSU banks are at a sweet spot as the economy is expected to remain resilient.
Ajit Kabi, Banking Analyst at LKP Securities, pointed out that since 2000, India has witnessed three periods when real economic growth exceeded 7 percent for a continuous stretch. Each phase preceded and was sometimes accompanied by the lending surge. This is because bank credit continues to play a significant part in financing activities, nevertheless the rise of alternative credits such as NBFCs and overseas loans.
Healthy quarterly earnings were also a factor that boosted the PSU banking space.
As ICICI Direct observed, PSU banks reported 20 percent year-on-year (YoY) and 13.6 percent quarter-on-quarter (QoQ) growth in net interest income (NII), the highest in the last eight quarters.
The brokerage firm underscored that the faster transmission of rate hikes on assets compared to liabilities and a healthy proportion of low-cost deposits led to a strong sequential rise in margins (10-40 bps QoQ). Management commentary suggests margins will remain steady at the current level in the second half of H2FY23.
Will the bullish phase end soon?
Jain of Arihant Capital said that most banks posted growth in line with market expectations and he expects a strong Q3 as well. But after this rally, one should book profits in the banking sector and stay with large banks such as SBI for portfolio, he said.
Kabi of LKP Securities underscored that Indian banks have benefited from the upcoming cycle of improving credit growth, higher margins and asset quality.
"Loan growth continues to be led by retail and SME segments, particularly for the private banks. Public banks are also growing at a strong pace. The coming year is expected to be strong as credit cost is likely to be lower and improving margins to add extra profitability," said Kabi.
Nonetheless, the deposit growth is likely to be the key monitorable, said Kabi as he expects the bull run to continue in the uptrend cycle.
ICICI Direct believes that the return on assets (RoA) for large PSU banks is inching towards 0.8-1 percent gradually.
"With a recovery in growth and stable asset quality, PSU banks are set for a further re-rating. Large PSU banks (SBI, Bank of Baroda, Canara Bank) are trading at nearly 0.8-1 times P/BV, which paves the way for a further re-rating as peak valuations remain at nearly 1.2-1.5 times in FY12-14. Mid-sized and small banks, currently trading at 0.5-0.7 times P/BV, touched nearly 1 time then. We remain positive on PSU banks, with upsides expected to continue in the medium term horizon," said ICICI Direct.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.