Are PSU Banks entering a new bull phase after stellar Q2 results? – News Air Insight

Mumbai: Public sector banks were among the top gainers in Monday’s trading, as their strong earnings show in the September quarter kept the momentum alive in what has been one of the most resilient themes in the past six months. The PSU Bank index rose 1.9% on Monday, against modest gains in the Sensex and Nifty.

Bank of Baroda shares were the top gainers on the index on Monday, up 4.7% after its second-quarter results exceeded expectations. Indian Bank rose 2.7%. Canara Bank, Punjab & Sind Bank, Union Bank of India, and Bank of India gained between 1.5% and 2% each.

“Strong second-quarter results and rising FII interest, both in the broader banking sector and in PSU banks due to their attractive valuations, have fuelled the recent rally,” said Vikas Gupta, CEO, OmniScience Capital.

News reports of the government considering an increase in the FII limit in public sector banks from 20% to 49% have also aided sentiment.

The Nifty PSU Bank index has been the top performer on the NSE over the past six months, soaring 27% during this period. The Nifty Private Bank index advanced 2.8% in the period, while the Nifty gained about 6%.

“Historically, PSU banks have traded at a discount to private peers due to lower net interest margins (NIMs), higher non-performing assets (NPAs), and greater MSME (micro, small, and medium enterprises) exposure,” said Narendra Solanki, head of Fundamental Research – Investment Services, Anand Rathi Share and Stock Brokers. “However, over the past 3-4 quarters, PSU banks have shown steady improvement with declining NPAs, stronger return ratios, and a resilient macro economy supported by higher government spending and favourable monsoons.” This has led to a rerating in valuations, said Solanki, with price-to-book (P/B) ratios rising from 0.4 to 0.6 times last year to 0.9 to 1.2 times. Analysts said compared to private banks, public sector banks have been much more reasonably valued, and after consistently improving results, investor interest in the sector has surged. “While most private banks delivered reasonable returns last year and now trade at 18-20 times earnings, PSU banks have remained relatively undervalued at just 5-8 times P/E,” said Gupta.