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Bank of Baroda, SBI and Canara Bank and other PSBs are outperforming the Sensex. What are they doing right?

Bank of Baroda, SBI and Canara Bank and other PSBs are outperforming the Sensex. What are they doing right?

Experts are confident that the PSBs, ongoing party will continue on Dalal Street, as their loan books and asset quality improve

Experts are confident that the PSBs, ongoing party will continue on Dalal Street, as their loan books and asset quality improve Experts are confident that the PSBs, ongoing party will continue on Dalal Street, as their loan books and asset quality improve

The uptick in credit growth, normalisation of asset quality and hopes of rising deposits amid higher interest rates have helped public sector banks (PSBs) continue in a happy space for the second year in a row on Dalal Street. The Nifty PSU Bank index has gained 28 per cent on a year-to-date (YTD) basis till September 20, compared to the benchmark Nifty 50’s 3 per cent rise. In 2021, the banking index had surged 45 per cent, while the Nifty 50 jumped 24 per cent, according to data from ACE Equity. Bank of Baroda emerged as the top gainer in the bank index with a 73 per cent rise. Shares of the lender zoomed to Rs 141.6 on September 20, from Rs 81.95 on December 31, 2021. Indian Bank (up 47 per cent) was the second-best performer, followed by State Bank of India (up 25 per cent) and Canara Bank (up 24 per cent). “The recent recovery in credit growth, backed by strong CASA, is helpful for PSBs amid a rising interest rate environment, as assets get re-priced faster than liabilities, which can boost return on assets and net interest margin,” says Deepak Kumar Lalla, Managing Director & CEO of SBICAP Securities.

PSBs witnessed a credit growth of 11.5 per cent for the quarter ended June 30, 2022, as per data released by the Reserve Bank of India (RBI). The figure stood at 7.8 per cent in the preceding quarter ended March 31, 2022, and 3.1 per cent in the corresponding quarter a year ago. On the other hand, private sector banks’ credit growth increased to 18 per cent in Q1FY23, compared to 10.1 per cent in Q1FY22.

The latest financial results highlight that the asset quality of most of the state-owned lenders has improved on a quarter-on-quarter (QoQ) basis as well as on a year-on-year (YoY) basis. The percentage of gross non-performing assets (NPA) for State Bank of India, the country’s largest lender by assets, stood at 3.91 per cent in Q1FY23 compared to 5.32 per cent a year ago. It was 3.97 per cent in the preceding quarter ended March 31, 2022. Likewise, the figure for Bank of Baroda came to 6.26 per cent for the quarter ended June 30, 2022, compared to 8.86 per cent as of June 30, 2021, and 6.61 per cent as of March 31, 2022. For the quarter ended June 30, lenders that are part of the bank index reported a combined net profit of over Rs 15,300 crore, up 9.24 per cent YoY.

But what does the future look like? Market watchers believe that the ongoing party in the PSB space will continue for some time. “Operating performance of the PSBs got normalised in the last three quarters, resulting in renewed interest of investors towards the stocks. We are also witnessing an uptick in credit growth, and thus, visibility of future earnings also improves,” says Ashutosh Mishra, Head of Research, Institutional Equity, Ashika Group. “Going ahead, PSU banks have a strong business case in the current environment due to their deposit mobilisation capability, which is getting the spotlight in the current scenario. Strong credit growth also gives the option to less efficient players to participate, and thus provides earning visibility,” he adds.
 

Published on: Sep 30, 2022, 7:33 PM IST
Posted by: Arnav Das Sharma, Sep 30, 2022, 7:29 PM IST