PSU banks trade firm in a volatile market; SBI scales fresh record high

In Q2, Motilal Oswal Financial Services estimates PSBs to report improved operating performance, supported by modest business growth and a gradual reduction in provisions.

Shares of public sector banks (PSBs) were on a firm footing in an otherwise volatile market today, with the sector giant State Bank India (SBI) trading at a new high on the expectation that the valuations for the sector would rerate upwards, driven by an uptick in credit offtake going ahead.

At 01:47 pm, the Nifty PSU Bank index, the top gainer among sectoral indices, was up 1.8 per cent, as compared to a 0.45 per cent decline in the Nifty50 index.

SBI hit a new high of Rs 507.50 as the shares rallied 4 per cent in intra-day trade today. In the past one month, SBI has outperformed the market by gaining 15 per cent, as compared to a 5 per cent rise in the benchmark index. SBI appears well-positioned to report a strong uptick in earnings, led by moderation in credit costs, as the bank has strengthened its balance sheet and increased its PCR (incl. TWO) to around 86 per cent, according to analysts.

Motilal Oswal Financial Services estimates PSBs to report improved operating performance, supported by modest business growth and a gradual reduction in provisions. Opex is likely to remain elevated on account of the revised guidelines on pension provisions while slippages from SREI Infra are likely to be offset by recoveries from the DHFL resolution, the brokerage firm said in its September quarter (Q2) results preview.

Among other individual stocks, Union Bank of India surged 8 per cent to Rs 49.20 while shares of Bank of Baroda, Indian Bank and Canara Bank were up between 2 per cent and 3 per cent on the NSE.

Supported by capital raise and government's capital infusion over the last few years, capitalisation profile for most of the PSU Banks is now fairly comfortable and they are in a robust position to start delivering strong loan growth and regain lost market share, analysts at JM Financial said.

"Incrementally, we expect PSU banks to see a recovery in their core fundamentals driven by improvement in asset quality performance, expansion of core profitability and expected improvement in credit growth supported by comfortable capitalisation levels. Further, most of the PSU banks are trading below their historical mean valuations, they added in a sector-specific report.

SBI remains our preferred pick in the space aided by its dominant position in the Indian banking system, unparalleled liability franchise, robust capital ratios, improving PPOP profile and expected improvement in return ratios with credit cost moderation, the brokerage firm said.