Nifty PSU Bank index hits 4-month high; SBI, Canara Bank up 3%

Shares of public sector undertaking (PSU) banks continued their upward journey with Nifty PSU Bank index hitting a four-month high on Tuesday on the expectation of decline in bad loans.

Nifty PSU Bank index, the largest sectoral gainer, was up 2.6% at 3,192 levels, trading at its highest level since September 6, 2018, on the National Stock Exchange (NSE). In comparison, the Nifty Bank and Nifty Private Bank index were up 0.6% each, while the benchmark Nifty 50 index was up 0.32% at 02:19 pm.

State Bank of India (SBI), Indian Bank, Syndicate Bank, Oriental Bank of Commerce and Canara Bank from the PSU bank index was up in the range of 3% to 4% on the NSE. Bank of India, Punjab National Bank (PNB), Vijaya Bank, Union Bank of India, Corporation Bank were up between 1% and 3%.

Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday expressed satisfaction over the performance of the banking sector saying bad loans have declined, particularly of state-owned banks.

Various initiatives taken by the government have yielded results, with the bad loans of public sector banks declining by over Rs 23,000 crore from a peak of Rs 9.62 lakh crore in March 2018.

"There is a considerable amount of improvements which have to be sustained if banks have to fulfil their responsibility and if some of the banks have to become healthy," Das said after meeting the representatives of the micro, small and medium enterprises sector in New Delhi.

PSU banks will likely return back to profitability, barring PNB, which will continue making residual provisions toward the fraud account, according to Motilal Oswal Securities.

The sharp moderation in bond yields should significantly boost the treasury performance of the banking sector, especially PSBs. PSBs under our coverage reported MTM losses of Rs 14,700 crore in 1HFY19. We expect this trend to reverse and banks to report healthy write-backs of investment provisions that they have been making, the brokerage firm said in December quarter results preview.

“Though we expect a marginal rise in absolute slippages on QoQ basis, we see both credit growth and pricing power returning to the banking sector. Treasury gains will be significant, which will eventually lead to a sharp improvement in profitability across banks. The PSBs are expected to report significant profit growth on low base effect”, Reliance Securities said in Q3FY19 results preview.

Analysts at Elara Capital expect banks’ profitability to improve after a long hiatus based on a few factors traction in credit expansion pace, much better loan pricing power considering weak financial condition of key competitor (NBFC), a fall in G-Sec yield, and improvement in NPL recoveries by upgradation of Jayaswal Neco, Binani Cements and Uttam Galva loan accounts.