PSU Bank index up 2% in weak market; IOB, UCO, Central Bank rally upto 15%

The Nifty PSU Bank index hit an intra-day high of 4,516.75, trading close to its record high level of 4,647.95 touched on July 27

Shares of public sector banks were in demand and surged up to 15 per cent on the National Stock Exchange (NSE) in Friday’s otherwise weak intra-day trade. The up move came on improved profitability and asset quality for the pocket.

At 02:14 pm; the Nifty PSU Bank index was the top gainer among sectoral indices, up 1.6 per cent. The index rose 2.5 per cent to 4,516.75 in intra-day trade. It was trading close to its record high level of 4,647.95 touched on July 27. In comparison, the Nifty 50 index was down 0.34 per cent, while Nifty Bank and Nifty Private Bank index too were down 0.50 per cent and 0.70 per cent, respectively.

Among the individual stocks, Indian Overseas Bank has rallied 15 per cent to Rs 31.10 in intra-day trade on the back of heavy volumes. A combined 116 million shares had changed hands on the NSE and BSE. CARE Ratings expects the bank to remain profitable in the medium term, with credit costs remaining moderate in line with the industry.

The stable outlook factors in the CARE Ratings’ expectation that IOB will be able to sustain profitability while maintaining comfortable capitalisation levels.  The rating is constrained by moderate asset quality despite improvement seen over the past few years, with improvement in gross non-performing assets (GNPA) and gross stressed asset position. Although the bank’s earnings profile has seen considerable improvement in the last two years ended March 31, 2023, as against the earlier years, the level of profitability continues to be moderate, the rating agency said in a rationale.

Shares of Central Bank of India, UcO Bank and Punjab & Sind Bank rallied in the range of 5 per cent to 8 per cent. Bank of Maharashtra, Bank of India, Indian Bank, Punjab National Bank, Union Bank of India, Canara Bank, Bank of Baroda and State Bank of India were up between 1 per cent and 4 per cent.

With credit costs steadily decreasing and expected to continue falling, PSU banks are well positioned to deliver 1 per cent return on assets (RoA) during FY24e, according to Investec Securities.

Indian Bank with substantial buffers on liquidity (131 per cent in Q1) and further room for net credit costs to moderate has significant headroom to improve RoAs above 1 per cent. For Union Bank of India, the brokerage estimates RoAs to be in the 0.9-1.0 per cent range over FY24-25 supported by lower net credit costs and moderate credit growth in the range of 12-13 per cent.

“For Canara, we continue to believe the bank has the lowest margin of safety on both P&L and balance sheet given its low liquidity cushion and capitalization vs peers and hence the risk reward is not favourable at 0.8x despite similar RoA profile,” the brokerage said in a report.