PSU bank stocks rise, IOB up 8%, Union Bank surges 2%; here's why

PSU Bank stocks surged on April 1, driving the Nifty PSU index up by more than one percent. According to analysts noted that the favorable credit environment at present has bolstered the asset quality of these banks, contributing to the rise in their stocks.

On Monday, shares of Indian Overseas Bank were trading 8 per cent higher, closed at ₹64.90. Meanwhile, Union Bank of India stock gained over 2 per cent to ₹156.95.

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Other PSU Banks like State Bank of India, Canara Bank, Bank of India were trading in green on April 1. The surge was propelled after brokerage firm BoFa Securities, as quoted by Moneycontrol, expresses]d its optimism regarding smaller PSU banks, attributing it to their favorable risk-reward profile due to higher earnings growth potential and valuation upside.

The brokerage firm further indicated that consensus estimates for FY25 are deemed conservative for PSU banks, hinting at the possibility of EPS upgrades ranging between 10 to 20 percent. This potential surge is attributed to growing confidence in both the reliability of earnings per share and the delivery of Return on Assets (RoA), alongside an uptick in foreign ownership.

Furthermore, other state-run lenders are noted to be lagging by one to two years in their earnings recovery cycle. This positioning suggests the potential for these banks to unveil positive surprises in financial years 2025 and 2026.

Foreign ownership in other state-run lenders still lags behind that of State Bank of India (SBI) and Bank of Baroda (BoB), but the brokerage anticipates this gap to diminish.

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The PSU Bank index has surged by 96 percent over the past year, with stocks like Canara Bank and Union Bank of India witnessing over 100 percent growth, while Bank of India shares have climbed by 80 percent.

The international brokerage recommended a "buy" stance on smaller PSUs such as Union Bank, Canara Bank, and Bank of India, setting target prices at ₹180, ₹600, and ₹170, respectively.

However, for SBI and BoB, the brokerage maintained a "neutral" rating. It cited high earnings expectations for both banks, leaving minimal room for further positive surprises.