PSBs in focus; Nifty PSU Bank gains 10% in 8 days

Shares of public sector banks (PSBs) continued their northward journey with the Nifty PSU Bank index gaining 10 per cent in past eight trading days on expectation of improving assets quality going forward. In comparison, the benchmark Nifty 50 index was up 3 per cent, while Nifty Bank index gained 4 per cent during the same period.

At 01:43 pm, Nifty PSU Bank index, the largest gainer among sectoral indices, was up 2.5 per cent, against 1 per cent rise each in Nifty 50 and Nifty Bank indices.

State Bank of India (SBI), Union Bank of India, Syndicate Bank, Oriental Bank of Commerce (OBC), Bank of India (BOI), Bank of Baroda, Canara Bank, Indian Bank and Punjab National Bank (PNB) were up 2 to 5 per cent on the NSE.

SBI, the country’s largest bank, said it will use the Reserve Bank of India’s (RBI’s) policy repo rate as a benchmark to set the savings deposit rates and those for short-term loans from May 1 this year.

The bank's call to link its key pricing decisions on savings bank deposits and short-term loans to the repo rate will help it address rigidities in the balance sheet and ensure a quick transmission of changes in the RBI's policy rates, SBI said in a statement.

Analysts at Narnolia Financial Advisors have ‘buy’ rating on SBI with a price target of Rs 348 per share, as the brokerage firm believes assets quality of the bank has been improving with the declining stress additions.

“We expect NIM to improve going ahead given the large low-cost deposits franchise. Further MCLR reset and lower slippages will provide support to margins. We expect earnings for FY20 to get boost from improving NIM, controlled opex and lower credit cost,” the brokerage firm said in company update.

Meanwhile, Moody’s Investors Service has upgraded the long-term local and foreign currency deposit ratings of Central Bank of India (CBI) and Indian Overseas Bank (IOB) to Ba2 from Ba3. Moody's has also upgraded their Baseline Credit Assessment (BCA) and Adjusted BCA to b2 from b3.

In the case of BOI, Canara Bank, OBC and Union Bank of India, Moody's has affirmed their local and foreign currency deposit ratings at Baa3/P-3. Moody's has also affirmed their BCA and Adjusted BCA at ba3.

Moody's has changed the outlook for CBI and IOB to stable from positive. For BOI, Canara, OBC and Union Bank, Moody's has maintained the outlook at stable.

The capital infusion from the Indian Government is the key driver for the rating action. The rating action also factors in the improvement in the six banks' asset quality, Moody’s said in a statement.

The decline in net non-performing lending (NPLs) was driven by an increase in provisions, with the banks using a part of the capital received for this purpose. In addition, the pace of new NPL formation has significantly reduced across all six banks in the first nine months of the financial year ending March 2019 compared to the last three years.

With an improved loan loss coverage and stabilizing asset quality, credit costs will be lower and result in improved profitability in 2020.

Funding and liquidity remains robust for all the banks impacted by this rating action, even though their solvency profiles have been under stress, due to rising NPLs and high credit costs, it added.