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Analysts allay fears of exuberance in public sector banks

SBI’s bad loans as a percentage of total loans on a standalone basis stood at 2.76% in June 2023 quarter, down from 3.91% a year ago (Photo: Mint)
SBI’s bad loans as a percentage of total loans on a standalone basis stood at 2.76% in June 2023 quarter, down from 3.91% a year ago (Photo: Mint)

Summary

After the one month rally through 18 September some of the smaller banks in the 12-member index have valuations topping those of larger peers SBI, Bank of Baroda and Punjab National Bank.

MUMBAI : PSU banks have rallied sharply in the past month, culminating in volumes on the Nifty PSU Bank Index, comprising 12 lenders, hitting a record high of 1.78 billion shares on 18 September. Normally this is a sign of worry, as the index has plunged 20-25% in the near term on previous occasions after volumes peaked.

But, analysts remain unfazed despite stocks like Indian Overseas Bank (IOB), UCO Bank, Punjab & Sind Bank, Central Bank of India and Bank of Maharashtra rising 25-50% in last month alone and their valuations looking stretched compared to State Bank of India (SBI), the country’s largest bank by assets.

Graphic: Mint
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Graphic: Mint

The drawdown (fall from peak to trough) in the index was 20% in the two following months from 18 February 2021 after volumes peaked on that day at 1.35 billion shares. Similarly, the index plumbed 21% when volumes peaked at 1.4 billion shares on 14 December.

“If anecdotal evidence is anything to go by, this is a worrying sign," said Rohit Srivastava, founder, IndiaCharts.

Indeed , after the one month rally through 18 September some of the smaller banks in the 12-member index have valuations topping those of larger peers SBI, Bank of Baroda (BoB) and Punjab National Bank (PNB). The tearing rally is underscored by the fact the index rise over the past month alone contributed 66% to last one last gain of 19.95%.

Further, price to book ratio of IOB, which rose by 47% over the past 30 days to 46.40, is at 3.48 against SBI’s 1.65, Bank of Baroda’s 1.14 and PNB’s 0.85. This is all the more glaring considering that IOB’s gross non performing assets (GNPA) in June 2023 quarter, altho-ugh down from a year ago, is at 7.13% of its advances. GNPA of UCO Bank, whose shares rose 49% in last 30 days, is at 4.48%. Also, weightage of the top three lenders SBI, Bank of Baroda and PNB in Nifty PSU Bank Index account for almost three-fifths of the index.

But, this is precisely what’s giving other analysts hope of the rally in the PSU bank index sustaining over a one to one and a half year time frame.

“Valuations of some smaller banks may be stretched and some may be overheated but looking at some of the larger PSU banks where price to book is less than 1 time, shows that valuations are still attractive and the index rally can sustain over the long term based on rising GDP growth prospe-cts and interest rates nearing a peak," said Gaurav Dua, SVP and head of capital market strategy at Sharekhan by BNP Paribas.

Dua’s top pick is Bank of India which has a price to book of just 0.76, followed by SBI, BoB and Canara Bank . The last one month has been more about a “catch-up" rally, according to him as PSU banks underperformed the market before that.

He reasons that the index will get further traction from these bigger banks. The weights of IOB (1.9%), Central Bank (1.74%), Bank of Maharashtra (3.16%) and UCO Bank are relatively negligible.

Rajesh Palviya, head of research (technical and derivatives) of Axis Bank, said the rally this time around was different and that it would continue as banks such as IOB, BoB, Canara Bank, PNB and Bank of Maharashtra have recently broken their multi-year highs .

To be sure PSU bank balance sheets are getting cleaner with NPAs moderating in the June quarter from a year ago. For example, SBI’s bad loans as a percentage of total loans on a standalone basis stood at 2.76% in June 2023 quarter, down from 3.91% a year ago.

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