PSU Bank leads Nifty pack, up 7.6% in the past two trading sessions

With asset quality improving, analysts see more growth

Shares of public sector undertaking (PSU) banks have been on a recent high, with the Nifty PSU Bank index surging 7.6 per cent in the past two trading sessions on the National Stock Exchange (NSE). On Tuesday, the Nifty PSU Bank was the top-performing sectoral gainer, ending the day 4 per cent higher, as compared to a 1 per cent rise in the Nifty50 index.

In the past three days, the PSU Bank index has outperformed the market by surging 8.1 per cent, as compared to a 2.8 per cent rise in the benchmark index. The rally comes amid stable operating environment, and expectations of strong earnings recovery in state-owned lenders.

After trade on Tuesday, Punjab National Bank, Canara Bank, Indian Bank, and Union Bank of India were up over 5 per cent while State Bank of India (SBI), Bank of Baroda and Uco Bank gained 3 per cent.

In an October 17 report, global brokerage Haitong initiated coverage of the sector as it believes PSBs are now better-placed with asset quality gradually healing, and a relatively better balance sheet i.e. higher coverage ratios (in the 65--78 per cent range), and CRAR -- capital to risk (weighted) assets ratio -- in the 13.4-16.5 per cent range, as on June-22.

“This augurs well for the improving growth trajectory, reducing LLPs (loan loss provisions), and return ratios over the next couple of years. Even as return ratios (RoAAs) are set to improve, they are expected to be below the previous peak (1.3 per cent), and remain sub-optimal (sub 1 per cent). Subsequently, our assigned multiples are lower as compared to the long term average, reflective of the relatively subdued RoAA,"the report said.

On the earnings front, analysts expect PSU banks to see treasury gains/reversal of treasury losses in the September quarter for the 2022-23 financial year (Q2FY23) with moderation in yields. Thus, other income should witness a meaningful jump on a sequential basis.

PSU banks might see loan growth in line with the system, while net interest income (NII) growth may be higher, at 15 per cent year-on-year (YoY), analysts at Prabhudas Lilladher said in their Q2 earnings preview report.

The brokerage firm expects NIMs — net interest margin — to remain steady on the quarter-on-quarter (QoQ) basis, at around 3 per cent. Asset quality could improve QoQ with gross non-performing assets (GNPAs) declining, leading to controlled credit costs. Earnings are expected to be better as NII, and fee income improve with controlled opex, analysts said.

Meanwhile, shares of SBI ended 3.5 per cent higher, at Rs 562.40, and have rallied 8 per cent in the past three trading sessions. The stock of the largest PSU bank is now close to its record high, of Rs 578.50, which it had touched on September 15, 2022.

On October 4, Fitch Ratings affirmed SBI’s long-term issuer default rating (IDR) at 'BBB-' with stable outlook. The agency has also affirmed the bank's viability rating (VR) at 'bb' and its government support rating (GSR) of 'bbb-'.

Fitch expects India’s GDP to grow at 7 per cent over the medium term and stable operating environment, despite some near-term inflationary pressures, to create moderate opportunities for banks to do profitable business.

“Our view is further aided by India's large and diversified economy, high domestic consumption growth, and reasonable insulation from external risks,” the rating agency said.

SBI's guidance of loan growth, of over 15 per cent in FY23, highlights that growth appetite is gradually returning across segments, amid an economic recovery. Fitch expects the retail business to remain the key growth driver, with the bank showing cautious optimism towards corporate and SME segments as interest rates rise. The bank is more focused on credit quality as its moderate capitalisation compels it to optimise capital utilisation.

“We expect SBI's impaired-loan ratio to continue to improve in FY23 (Q1FY23: 3.9 per cent), supported by lower fresh impaired loans and ongoing recoveries. A more meaningful unwinding of relief loans will likely test this trend in FY24, but loan impairment charges will likely remain below 1 per cent, provided there are no negative shocks from this pool of stressed Covid-19-affected loans. Specific provision cover on legacy impaired loans is 75 percent while overdue loans (between 30-90 days) are limited at 0.24 per cent,” Fitch said in key rating drivers.

Separately, CARE Ratings said SBI's credit costs are expected to remain moderate and profitability is expected to improve over the coming quarters as the bank has repayment of sizeable amount of its available for sale (AFS) investment portfolio to be redeemed, which would reduce the mark-to-market (MTM) losses.

The consistent improvement in SBI’s asset quality parameters over the last three years, with limited slippages, considering the stress induced due to Covid-19 and the resultant moderate level of credit cost, helping enhance the earnings profile. Supported by strong internal capital generation, the bank has adequate capitalisation levels and an adequate cushion to absorb any asset quality stress in the near term, the rating agency said in rationale.