IOB, Union Bank, UCO Bank, BOI, other PSU bank shares climbed up to 52% in 30 days. Here's why

Shares of many PSU banks such as Indian Overseas Bank Ltd, Central Bank of India (Ltd), UCO Bank Ltd, Punjab & Sind Bank, Union Bank of India and Bank of India (BOI) among other PSU banks rallied up to 52 per cent in the last one month, thanks to healthy growth trends, recent investment guidelines and news flow around housing loan subsidy. In contrast, big private banks such as HDFC Bank Ltd, ICICI Bank Ltd and Kotak Mahindra Bank Ltd delivered negative returns during the same period.

Emkay Global noted that the banking system’s credit growth remained healthy at 15 per cent YoY (ex-HDFC) for the fortnight ended September 8, 2023, running well above the 12-13 per cent growth. Apart from retail growth, led by unsecured loans and vehicle finance, corporate credit is also showing signs of pick-up, it said.

"According to our discussions with PSBs, corporate capex demand is rising up well, but it is yet to be seen if the momentum will persist, given upcoming elections and the elevated rate environment. Further, PSBs are showing aggressive growth strides in SME/mid-corporates, given their rate advantage and, thus, reclaiming some lost ground from private banks," the brokerage noted. PSB stands for public sector bank.

Shares of IOB climbed 52.66 per cent to Rs 48.41 level on Tuesday from 31.71 per cent on September 4. It has been followed by  Central Bank of India (up 42 per cent), UCO Bank (up 36 per cent), Punjab & Sind Bank (up 28 per cent), Union Bank (27.28 per cent) and Bank of India (up 26 per cent). The largest PSU bank State Bank of India (SBI) rose 4.7 per cent during the same period.

Punjab National Bank, Bank Of Maharashtra, Indian Bank, Canara Bank and Bank Of Baroda also gained 11.23 per cent during the same period.

On the flip side, HDFC Bank declined 4.81 per cent in the one-month period, ICICI Bank fell 2.74 per cent while Kotak Mahindra Bank slipped 2.06 per cent. Axis Bank added 5.8 per cent.

"The proposed Housing Subsidy Scheme of Rs 60,000 crore should provide at least Rs 5 lakh crore disbursement opportunity in the affordable housing segment, which we believe should be positive for PSBs. Overall, deposit growth is also trending well at 13% YoY, but competition has heated up, leading to a flare-up in bulk deposit rates. Separately, recent data on net household financial savings has been the weakest in decades (5.1 per cent of GDP) and, thus, could pose a challenge to deposit growth in the future. Hence, most banks, including PSBs are accelerating branch expansion to tap new growth pockets for deposits in semi-urban/rural areas as well as states like J&K/Northeast," Emkay Global said.

Notwithstanding near-term margin contraction, Emkay Global said healthy growth and moderating LLP should continue to support profitability. It does not expect any meaningful asset-quality deterioration yet, but felt some caution is needed in lenders with higher exposure to unsecured loans or crop loans, given some early signs of stress in select pockets and the RBI’s recent red flag.

"Thus, we prefer banks with strong capital/provision buffers and better return profile, including ICICI Bank , IndusInd Bank, KVB, RBL Bank, Indian Bank and SBI. We believe HDFC Bank will endure merger pain in Q2, but it should gradually recover and, thus, it offers a good defensive bet from a long-term outlook," the brokerage said.

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