Home / Markets / Mark To Market /  Why investors are upbeat about PSU bank stocks

Bank stocks are the flavour of the season. Significant improvement in balance sheets of banks and strong pickup in credit growth are some reasons for the optimism. Within the sector, shares of public sector lenders have put up a better show. The Nifty Bank index has risen by 14.5%, while the Nifty PSU Bank index has gained 25.7% so far in CY22. During this period, the Nifty 50 index has risen by just 1.6%. PSU is public sector unit.

PSU banks had remained laggards for a long time, which means valuations were relatively low to start with. “Subdued bank credit growth (for PSUs) observed in the last few years was mainly on account of weak demand, balance sheet deleveraging, shift to other funding sources and risk aversion by lenders," according to a report by ICICI Direct Research dated 20 September.

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However, there has been a gradual improvement in asset quality of public sector lenders driven by many factors, including lower fresh slippages. “Thus, asset quality pains of PSU banks seem to have bottomed out as the GNPA (gross non-performing assets) ratio has moderated to its lowest level in the last couple of years," according to analysts at ICICI Direct.

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In the Nifty PSU Bank index, Bank of Baroda (BoB) is the top performer in CY22 so far, appreciating by nearly 69%.

The path ahead for all public sector banks is robust, but better performance in some parameters by BoB may have helped improve investor sentiments. In Q1, BoB’s overall loan book grew by 18% year-on-year (y-o-y), higher than about 15% growth each for State Bank of India and Canara Bank.

Meanwhile, as of 26 August, non-food credit growth stood at a robust 14.8%.

As such, for the banking sector, analysts expect an increase in corporate loans, which have been a drag on overall credit growth.

Despite the strong movement in shares of public and private banks in recent months, the price to book ratios are still either close to their long-term averages or marginally higher, said analysts at Kotak Institutional Equities. “Public banks are just marginally higher than where they were pre-covid despite substantial improvement in their asset quality ratios. On the other hand, the improvement in valuations for private banks has been relatively slower," Kotak said. One reason for this could be the underperformance of shares of HDFC Bank.

Even as credit growth is improving, investors should keep a tab on the trajectory of deposit growth, which has lagged.

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