PSB stocks rally in the absence of loan waiver

CNX PSU Bank Index up 2.9% with Bank of Baroda soaring 5.2%, PNB jumping 4.5%

Shares of public sector banks rose on Wednesday for a second day as investors were relieved that the government did not dole out any major loan waivers ahead of the national polls. Analysts said traders covered their bearish bets on these banks because once the election dates are announced, rules do not allow the government to make moves that influence voters’ decisions.

“There is a relief that the government cannot announce big loan waivers with the election dates announced. Any waivers would have worsened the health of public sector banks,” said Amit Jain, senior banking analyst, Sunidhi Securities.

The CNX PSU Bank Index rose 2.9 per cent on Wednesday, with Bank of Baroda soaring 5.2 per cent and Punjab National Bank 4.5 per cent. The Bank Nifty gained 1.5 per cent while the benchmark Nifty rose 0.5 per cent.

Public sector banks were among the worst performers in 2013 and have been reeling under investor apathy so far in 2014 because of rising bad loans and a slowing economy.

Finance Minister P Chidambaram said on Wednesday that non-performing loans of public sector banks are expected to be slightly higher this financial year from a year earlier. Recently, a state-owned lender United Bank of India saw a surge in non-performing loans, leading to its chairman quitting.

Higher government bond yields also affected the bond portfolios of public sector banks, which are known to hold more securities than required. As a result, investors preferred private sector lenders such as HDFC Bank, ICICI Bank and Axis Bank, which have fewer instances of bad loans.

Fund managers say some value pickers on Dalal Street have started nibbling at the battered shares of public sector banks of late as they believe the interest rate cycle has peaked. Any further decline in consumer inflation may prompt the Reserve Bank of India to cut policy rates, they say. Analysts say public sector banks are the best placed to benefit from falling interest rates as this could boost their bond portfolios.