PSU banks in focus; Bank of India, PNB, Bank of Baroda up over 2%

Oriental Bank of Commerce, Bank of India, Union Bank of India, Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank up 2% to 5% on NSE.

Shares of public sector (PSU) banks have moved higher by 4% on the National Stock Exchange (NSE) after Moody's Investors Service said the outlook for the banking system in India (Baa2 stable) over the next 12-18 months are stable due to strength of economy and weak-but-steady asset quality.

Oriental Bank of Commerce, Bank of India, Union Bank of India, Bank of India, Punjab National Bank (PNB), Bank of Baroda and Canara Bank were trading 2% to 5% higher on the NSE.

At 01:55 pm, Nifty PSU Bank index had moved up 1.2% at 2,949 levels, as compared to a 0.1% rise in the benchmark Nifty 50 index. Nifty Bank and Nifty Private Bank index were up 0.05% respectively.

The stable outlook is based on Moody's assessment of six drivers, all of which Moody's assesses are stable. The six drivers are operating environment; asset quality, capital; funding and liquidity; profitability and efficiency; and government support.

On asset quality, Moody's says that this factor will remain stable but weak, as the clean-up of legacy problem loans, nears completion and corporate health improves. In particular, the banks have recognized the bulk of legacy problem loans and will start making recoveries from large resolved non-performing loans (NPLs). This will help to shore up asset quality, although the degree of success in the resolution of large NPLs will determine the extent of asset quality improvements.

Moody's says that government support for public sector banks will stay strong. Capital infusions over the past few years for all public sector banks facing capital shortfalls, as well as other government measures, providing strong support for Moody's assumption of very strong government support for public sector banks.