State-owned banks clock best monthly returns in five years

Despite the rise, most PSU banks still trade below their book value

Shares of public sector banks jumped more than 25 per cent in March, their biggest monthly gain since May 2009.

Analysts attribute the rally to improving macroeconomic situation — cooling off of inflation and narrowing of the current account deficit. The move by Reserve Bank of India (RBI) to delay implementation of the Basel III capital adequacy norms has given a further boost to these stocks, they said.

The National Stock Exchange (NSE) PSU banking index (CNX PSU Bank) gained 26.6 per cent this month, the sharpest increase in five years.

In May 2009, CNX PSU Bank Index had vaulted 43 per cent after the United Progressive Alliance was re-elected in the general elections.

Meanwhile, the benchmark CNX Nifty gained 6.8 per cent and the Bank Nifty, which also includes private sector banks, gained 18.4 per cent during the month.

The central bank, last week, pushed back the deadline for Indian banks to meet stricter capital requirements under the Basel-III norms by a year to March 2019.

“The central bank’s move (to delay implementation of Basel-III) is positive for banks, especially PSUs, as it provides a leeway for banks already grappled with asset quality stress,” said analysts at Angel Broking in a client note.

Manish Ostwal, an analyst at K R Choksey Institutional Research believes the changes in Basel-III implementation would provide breathing space to banks in general, and PSU banks in particular.

“As far as the pecking order of positive impact is concerned, we think Union Bank of India (UBI), Oriental Bank of Commerce (OBC), Bank of Baroda (BoB), Bank of India (BoI), Punjab National Bank (PNB) and State Bank of India (SBI) would benefit the most from these changes due to their lower core tier-I capital position,” he said in a recent report.

Among the state-owned banks PNB, BoI, BoB, OBC, UBI, Indian Bank and Bank of Maharashtra rallied more than 30 per cent each. SBI, Canara Bank and Allahabad Bank gained between 20 per cent and 25 per cent this month.

“Despite the outperformance, the public sector banks (PSBs) are trading lower than the historical averages and have enough headroom to expand the price to book value (P/BV) multiples, on the back of expected improvement in macros and continued accommodative steps by RBI,” point out analysts at HDFC Securities in a note.

Currently, SBI, the largest PSB, trades at a P/BV of 1.19 times, while most other PSBs are trading below their book value.

BoB trades at a P/BV of 0.87 times, while PNB is trading at P/BV at 0.79 times. BoI trades at a P/BV of 0.54 times, while Canara Bank trades at a P/BV of 0.44 times.

CNX PSU Bank index trades at a P/BV of 0.98 times as against Bank Nifty which is trading at a P/BV of 2.24 times.