PSU Bank index soars 73% from June lows; UCO, BOI, Canara zoom up to 102%

In the past one month, the Nifty PSU Bank index has rallied 31 per cent as compared to a 2.8 per cent rise in the Nifty 50 index

Shares of state-owned banks continued their northward movement as the Nifty PSU Bank index hit a new high of 3,952.60 in intra-day trade on Tuesday.

The index has surged 73 per cent from its June 20 level of 2,283.85, which was its 52-week low, following strong earnings from banks in the July-September quarter (Q2FY23).

In the past one month, it has rallied 31 per cent as compared to a 2.8 per cent rise in the Nifty 50. While the stock prices of UCO Bank, Union Bank of India (UBI) and Bank of India have surged between 54 per cent and 65 per cent during this period. 

Bank of Maharashtra, Punjab & Sind Bank, Central Bank and Indian Overseas Bank have gained in the range of 31 per cent to 40 per cent over the previous month. 

Meanwhile, over the 52-week lows of June this year, UCO Bank, Bank of India, Canara Bank and Bank of Maharashtra have rallied 80-102 per cent. While, UBI, Bank of Baroda and Indian Bank too have more-than-doubled from their respective 52-week lows touched between December 2021 and May 2022. Most of these stocks are now trading at their two-year highs on the NSE.

In the first half of the current financial year 2022-23 (FY23), the cumulative net profit of all public sector banks (PSBs) increased by 32 per cent to Rs 40,991 crore.

The government's efforts to reduce bad loans were yielding result with 12 public sector banks reporting a 50 per cent jump in combined net profit at Rs 25,685 crore in the second quarter ended September, Finance Minister Nirmala Sitharaman had said earlier this month.

In the July-September quarter (Q2FY23), the overall banking sector seems to be on a strong footing led by revival in business growth, improvement in margins and continued declining trend in NPA ratio, which has propelled earnings and thereby return ratios.

Strong credit demand from retail & MSMEs coupled with a gradual revival in the corporate segment led to a continued uptick in credit growth. Faster transmission of rate hikes on assets compared to liabilities and healthy proportion of low cost deposits resulted in an uptick in margins across lenders. A declining trend in slippages led to lower credit cost and further improvement in NPA numbers, analysts at ICICI Securities said in a Q2FY23 earnings wrap.

In the PSU space, SBI reported a 39 bps QoQ decline in GNPA and 9 bps decline in restructured (R/s) book. Bank of Baroda continued to maintain its healthy run on the asset quality front as GNPA was down 95 bps while restructuring pool also declined 30 bps QoQ. The brokerage firm believes the asset quality trend should continue to improve as well while management commentaries have also indicated incremental stress will be lower.

Among PSBs, BOB, SBI, Union Bank and Canara Bank surprised positively on growth/earnings, while Punjab National Bank disappointed due to higher provisions, analysts at Emkay Global Financial Services said in a BFSI sector update.

Amid stress-flow from the restructured pool, banks continued to report net negative slippages due to better recovery trends and ability to write-off, given the strong provisioning buffers. This, along with strong credit growth, led to a sharp 70 bps QoQ reduction in GNPA ratio for PSBs to 5.8 per cent and a 30 bps reduction for PBVs to 2.9 per cent.

The brokerage believes the improving loan-to-deposit ratio or LDR (mainly for PSBs) and re-pricing of MCLR loans will continue to support margins in 2H, leading to better core-profitability.