PSB rally has more legs; re-rating, more upside likely, say analysts

The analysts see more value in larger PSU banks as the risk of equity dilution lies more in small and mid-sized PSU banks

Even after a record rally in public sector bank (PSB) stocks since the announcement of recapitalisation plan, analysts covering the sector sees more upside as they believe the financial health of the PSBs will soon improve, triggering a re-rating of these bank stocks.

The analysts, however, see more value in larger PSU banks as the risk of equity dilution lies more in small and mid-sized PSU banks. 

Since the announcement on October 24, the Nifty PSU Bank index has rallied over 23%, as compared to just 1% rise in the benchmark Nifty50 index, ACE Equity data show. 

Among individual stocks, Punjab National Bank (up 42%) rallied the most during the same period, followed by Union Bank of India (34%), Bank of India (29%), Canara Bank (27%) and State Bank of India (22%), ACE Equity data show.

The Nifty PSU Bank is the largest sectoral gainer in Monday’s trade, rallying over 3% to 3,986 in intra-day trade so far. 

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Siddharth Purohit, research analyst at SMC Institutional Equities sees more upside in the PSB stocks, advising long-term investors to stay invested and add on dips. 

“The recapitalisation plan will enable PSU banks to not only take higher provisions and repair their balance sheet, but also help them compete better with the private banks. Additionally, the government’s plans to bring more reforms in the banking space will also push the stocks higher,” he said.

“While the traders could exit the stocks post this rally, long term investors should stick to PSU banks and rather accumulate on dips as the financial health is likely to improve and further re-rating is possible,” he added. 

A K Prabhakar of IDBI Capital echoes the same views, but cautions that the PSU bank stocks may be volatile in the near-term. 

“PSU bank stocks are attractive at these levels, but may not rally immediately since September quarter results are yet to come out. I expect volatility in the near-term as Q2 may throw some negative surprises. The top five PSU bank stocks - SBI, PNB, Canara Bank, Union Bank and BoB – could be bought at the current levels.

Meanwhile, analysts at Kotak Institutional Equities although expect the bulk of the current capital infusion program to benefit the small public banks, they do not see much upside in the stocks of smaller PSBs on account of equity dilution. 

“We would be quite worried to invest in the smaller public banks as they entail significant book value dilution. the average book value per share dilution could be nearly 20-40% even if we assume that the capital infusion will be at a 20% premium to the current market price. This would imply that even if the banks are trading at a significant discount to the reported book value, the upside is unlikely to be material,” Kotak Institutional Equities said in a note.