RBI panel report boosts public sector bank shares

Govt stake could be lowered to 50% if recommendation accepted

Shares of state-owned banks rallied on Wednesday, a day after a Reserve Bank of India (RBI) panel recommended reducing the government’s stake in these. Chaired by Axis Bank’s former chief executive, P J Nayak, it recommended the government bring its promoter holding in public sector banks (PSBs) below 50 per cent.

Stocks of Canara Bank, Union Bank of India and Bank of India gained a little over nine per cent each on a day when the benchmark indices closed flat. The CNX PSU (public sector undertaking) bank index rose 3.3 per cent on Wednesday.

“Government reducing its stake would mean these banks get the flexibility to raise more money from the market. All these banks have a need to strengthen their capital base,” said Gaurav Dua, head of research, Sharekhan.

PSBs have been under a cloud for the past couple of years, on account of waning asset quality. The rise in non-performing asset levels had made them unpopular, leading to a downgrade of the entire sector. However, in the election frenzy which picked up pace since January, investors have flocked to the till-then unpopular financial sector in the hope of a turnaround in the economy. Analysts believe early signs of improvement in the economy will be first reflected in banking sector stocks.

Since January, the CNX PSU bank index has seen gains of 29 per cent, after having declined by 30 per cent through 2013. The NSE Nifty has risen 13 per cent so far this year; for all of last year, the Nifty was up about seven per cent. Analysts said investor interest is likely to remain intact, as they're betting on a stable government after the final election results on Friday.

Yet, they also warn against possible downsides in these stocks if the election outcome is not in line with market expectations. “These banks are still struggling with poor asset quality issues and the March quarter results have also not been good. How these stocks perform will depend on the election outcome,” said Sunil Jain, vice-president, equity research, Nirmal Bang Securities.

Dipen Shah, senior vice-president, research, at Kotak Securities, believes a further rise in the stocks will depend on the new government's policies. At the same time, investors looking to book profits should seize the opportunity. “In our view, the stocks have moved up quite a bit and short-term investors could consider profit booking,” he said.