PSU banks in demand; CNX PSU Bank index surges 4%

SBI, Bank of Baroda, PNB, Canara Bank, Andhra Bank, Union Bank of India and Oriental Bank are up 2-6% on NSE.

Shares of public sector undertaking (PSU) banks are in demand and trading higher by up to 6% on the National Stock Exchange (NSE).

State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Canara Bank, Andhra Bank, Union Bank of India and Oriental Bank of Commerce are up 2-6% on NSE.

At 1501 hours, the NSE state-owned bank index CNX PSU Bank has surged 4.23% compared to 0.45% rise in the CNX Nifty and 0.39% gain in Bank Nifty.

SBI, the largest gainer among the pack, has rallied about 6% to Rs 2,951, its highest level since April 2011 on NSE, after the bank’s asset quality was stable with July-September 2014 (Q2) gross non-performing assets (NPA) as a percentage of total advances at 4.89% against 4.9% quarter-on-quarter (Q-o-Q).  Net NPA was at 2.73% against 2.66% sequentially. Gross and Net NPA stood at 5.64% and 2.91% respectively in September 2013.

Analyst at HDFC Securities maintains ‘buy’ rating on the stock with target price of Rs 3,045, while  analyst at IndiaNivesh maintain ‘buy’ with upwards revised target price of Rs 3,230.

Meanwhile, CRISIL Research believes that increasing economies of scale (with higher business per branch) and usage of low-cost channels such as business correspondents (BCs) will help public sector lenders, who are currently incurring losses in their rural operations, to turn in profits over a five-year timeframe.

Rising scale and reduction in costs will drive down the opex ratio -- or operating expenditure as a proportion of average funds deployed – of the rural branches of lenders, which is as high as 1.6 to 2.0 to times that of non-rural branches, to 1.3 to 1.4 times by 2018-19. Asset quality will also improve as credit bureaus and research agencies penetrate deeper into the countryside, and as economic growth picks up. These factors will help ratchet up profitability, research firm said in a press release.