Nifty PSU Bank index surges 5%; Canara Bank, BoB, Indian Bank gain over 5%

According to reports, the Centre is likely to tell the Indian Banks' Association (IBA) to set up its proposed "bad bank" with financial support from banks

Shares of public sector banks (PSU) were in focus on Wednesday in an otherwise range-bound market with the Nifty PSU Bank index surging 5 per cent on the National Stock Exchange (NSE).

At 11:10 am, Nifty PSU Bank index, the top gainer among sectoral indices, was up 4.7 per cent, as compared to 0.05 per cent decline in Nifty 50 index. Nifty Bank and Nifty Private Bank index were up 1 per cent each on the NSE.

Indian Bank, Bank of Baroda, Canara Bank and Bank of Maharashtra were up in the range of 6 per cent to 9 per cent, while, State Bank of India (SBI), Punjab National Bank (PNB), Bank of India, Indian Overseas Bank and Union Bank of India from the PSU bank index were trading higher between 3 per cent and 5 per cent.

According to a Business Standard report, the Centre is likely to tell the Indian Banks’ Association (IBA) to set up its proposed “bad bank” with financial support from banks, instead of asking the government to become a promoter.

In a proposal to the finance ministry and the Reserve Bank of India, the IBA had proposed a national-level asset reconstruction company (ARC) owned by the government with its capital infusion worth Rs 10,000 crore. CLICK HERE TO READ FULL REPORT

IBA is mainly dominated by PSBs and they seem to be looking at some exit route for the non-performing assets (NPAs) on their balance sheets, which have been largely provided for. However, the Bad Bank concept has been talked about many times in the past, but never formed, given the bad experience and it is difficult to understand why and how the government will support this idea now, analysts at Emkay Global Financial Services said.

Any Bad Bank or Bad Fund needs a strong and continuous funding support, political will, robust managerial support and dedicated legal support, without which it will fail. Our discussions with banks suggest that PSBs are more inclined toward the formation of a bad bank compared to their private peers, the brokerage firm said in BFSI sector update.

Meanwhile, a decline in interest rates along with a bump up in investment (as banks are seeing inflow of deposits and lack disbursement opportunity amid lockdown) is seen favouring treasury gains in the April-June quarter (Q1FY21).

“Further, interest rates are expected to remain low, though declining trend is seen getting pared down leading to moderation in treasury benefit post Q1FY21E. PSU banks, being more sensitive to change in yield, will remain major beneficiaries with positive impact in the range of 10-30 per cent while the benefit for private players will remain in lower single digits,” analysts at ICICI Securities said in banking sector update.

“As with the previous quarter, the extension of moratorium on loan repayment implies that the headline earnings print does not reflect the current status of the business-at-hand. Higher treasury gains drove meaningful sequential increase in non-interest income in 4QFY20 as the decline in sovereign bond yields led to MTM gains. While the yield on the 10- year G-sec declined ~40 bps in 4QFY20, it declined further by ~25 bps in 1QFY21. Hence, we expect treasury gains to be robust in 1QFY21 but lower qoq,” Kotak Securities said in sector update.