Why analysts believe state-owned banks likely to continue their outperformance – highlight key triggers; Nifty PSU Bank up 4.5%

Nifty PSU Bank: On the back of multiple positive triggers, the public sector banks may continue their outperformance on a healthy outlook, analysts believe. Nifty PSU Bank closed among the top gainers, up nearly 4.5 per cent to 3,690.15 levels, led by a robust rally in State Bank of India and Bank of Baroda on Monday.

Both the state-owned lenders – SBI and BoB jumped during today’s session mainly on a strong set of numbers in the second quarter of the financial year 2022-23 (Q2FY23). The former reported highest ever profit of Rs 1325 crore, up 74 per cent and the latter’s profit surged 59 per cent year-on-year.

“The weekend saw the results of two major PSUs – SBI and BoB. Both reported strong earnings, with strong operating metrics. These fundamental metrics are likely sustainable for the two major banks, and we expect re-rating,” Hemali Dhame, associate vice-president - research, Kotak Securities said.

“Even though we have seen the run-up in prices, we expect the strong fundamentals will improve the probability of further rerating albeit gradually from here on,” Dhame further added in her quote.

Among the 12 stocks in Nifty PSU, SBI and BoB gained most by over 3 and 8 per cent at the close, however, on an intraday basis both touched their respective 52-week highs of Rs 622.70 and Rs 161.60 per share on the NSE.

While other PSU Banks such as Union Bank, Bank of India, Canara Bank, and Indian Bank were each up between 3-6 per cent, similarly, Bank of Maharashtra, UCO Bank, and PNB gained between 0.5-2.5 per cent on the NSE.

On the contrary, Indian Overseas Bank, Punjab and Sind Bank and Central Bank defied the gaining streak on Monday and closed lower between 0.2-3.5 per cent on the NSE.

Market expert Sandeep Jain, Director at TradeSwift, a broking firm, said that the PSU banks have been underperformer and are extremely cheap, however, they are now catching up the rally.

He added the bad assets problem of mainly PSU banks has been resolved with government initiatives like NARCL (National Asset Reconstruction Company Limited). NARCL is set up to take over large bad loans of more than Rs 500 crore from banks.

PSU Banks are not seeing any NPA (non-performing assets) issues, moreover, the provisioning old NPA has been done, so the sector is revolving around all positivity, Jain said in his comment.

Amon other triggers, the market expert noted that most of the state-owned banks have also come out of the Reserve Bank of India’s PCA (Prompt Corrective Action) norms. He also expects the merger of majority of these PSU banks going forward, which shall also act as a positive.

Jain believes Union Bank of India, IDBI Bank and Bank of India still have the steam to surge and chooses IDBI Bank as a top pick.