Year-ender 2023: Nifty PSU Bank index jumps 28% in 2023. Can PSBs sustain the rally in 2024?

The Nifty PSU Bank index jumped 28 per cent in the year 2023 so far (as of December 20) while the benchmark Nifty 50 gained about 17 per cent in the same period.

Nishant Kumar
Updated29 Dec 2023, 02:12 PM IST
Stocks such as Punjab National Bank and Indian Bank surged over 50 per cent each this year.
Stocks such as Punjab National Bank and Indian Bank surged over 50 per cent each this year.(Pixabay)

Most PSU bank stocks recorded substantial gains in the calendar year 2023, leading their sectoral index, Nifty PSU Bank, to significantly outperform the benchmark index, Nifty 50. The Nifty PSU Bank index jumped 28 per cent in the year 2023 so far (as of December 20) while the benchmark Nifty 50 gained about 17 per cent in the same period.

Stocks such as Punjab National Bank and Indian Bank surged over 50 per cent each this year while shares of Central Bank of India, Bank of Maharashtra and Union Bank of India jumped over 40 per cent each.

Year-to-date (YTD) performance of Nifty PSU Bank stocks.

Healthy growth in advances, net interest income (NII), reduction in gross NPAs and strong growth in profitability are some of the factors that boosted PSU bank stocks. Moreover, investors eagerly bought these stocks due to their attractively low valuations.

"Stock prices of public sector banks (PSBs) were driven by healthy growth in advances, strong growth in net interest income (NII), reduction in gross non-performing assets (GNPA), improvement in the restructured portfolio and robust growth in profitability," Vijay Gour, Analyst - BFSI at Choice Broking pointed out.

Abhishek Jain, Head of Research at Arihant Capital pointed out that the the rally in PSBs can be attributed to several factors, including low valuations and improving asset quality.

"These banks were trading at attractive valuations, making them appealing investment options. Moreover, the consistent performance of companies like Bharti fueled optimism, with expectations of stake sales post-elections, starting with IDBI Bank," said Jain.

"Another crucial factor contributing to their success has been the improving asset quality. The market's growing belief that the worst phase of asset quality issues is over has played a significant role. This positive sentiment is expected to continue, with the asset quality cycle likely to remain favourable in the coming quarters," Jain said.

Shreyansh Shah, a research analyst at StoxBox underscored that the main reasons for PSU banks witnessing momentum throughout 2023 are the results seen in their operational efficiency post the merger that had taken place in 2018-19.

"The minimal intervention of the government has resulted in significant improvement in most of the PSBs’ asset quality. The management of PSBs has made significant structural changes in their business strategies and now focuses more on the granular disbursements which has improved their net interest income substantially over the years," said Shah.

"Also, the recent RBI circular on risk weights has marginally impacted PSBs as they have more-than-required capital at their disposal which would help them to gain market share in unsecured and NBFC segments," Shah said.

On the valuation front, Shah pointed out that the P/B (price-to-book value) metric is still attractively placed along with healthy return ratios.

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Also Read: Indian stock market: How big is the Covid risk for equities? Experts answer

The road ahead

Experts are positive about the prospects of public sector banks for the next year.

Gour expects PSU banks to do well in the long term on account of growth in advances, and reduction in GNPAs.

"We expect the credit growth to be driven by personal loans, services, and SMEs. Improved financial profiles of the banks are also expected to support for their credit growth. We do not expect any meaningful changes in interest rates and inflation in the short term. However, the asset quality of the agri portfolio should be monitored for Q3FY24 and Q4FY24 due to erratic monsoon in 2023," said Gour.

Jain believes if the trend of improved asset quality and performance is sustained, PSU banks could maintain their upward trajectory in 2024, potentially leading to continued market interest and investment in these stocks.

Shah is positive about the PSB stocks.

"Although banks are facing the brunt of NIMs (net interest margins), we believe they would still post decent profitability in the medium term due to high credit growth and healthy cross-selling," said Shah.

Brokerage firm Motilal Oswal Financial Services estimates the top six PSBs under its coverage to report a PAT of 1.5 lakh crore and 1.7 lakh crore in FY25 and FY26, respectively, while sector RoA (return on assets) and RoE (return on equity) may improve to 1.2 per cent and 17.9 per cent, respectively, by FY26E.

The brokerage firm pointed out that several PSBs have raised capital from the market and have shored up their capitalisation levels, which will enable healthy balance sheet growth, particularly as the capex cycle recovers after the general elections.

"We believe that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector. We introduce FY26E and roll-forward target prices for our PSBs coverage universe. We thus revise our target price for State Bank of India ( 800), Bank of Baroda ( 280), Indian Bank ( 525), Union Bank of India ( 150), Canara Bank ( 550) and Punjab National Bank ( 90)," said Motilal Oswal.

State Bank of India, Bank of Baroda and Canara Bank are Motilal's top picks.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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First Published:29 Dec 2023, 02:12 PM IST
HomeMarketsStock MarketsYear-ender 2023: Nifty PSU Bank index jumps 28% in 2023. Can PSBs sustain the rally in 2024?

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