PSU Bank index up 31% in 1 wk on strong SBI Q3 results, privatization hope

SBI, Indian Bank, Bank of Baroda, Canara Bank, Punjab National Bank and Bank of India were rallied between 25 per cent and 50 per cent in past one week.

Shares of public sector banks (PSBs) were on a roll on Friday with the Nifty PSU Bank index surging 8 per cent, hitting a fresh 52-week high on the National Stock Exchange (NSE) after sector giant State Bank of India (SBI) reported a solid set of numbers for the quarter ended December 2020 (Q3FY21). Besides, the government's proposal to privatize two PSU banks in the financial year 2021-22 (FY22) also fuelled rally in these stocks.

At 09:30 am, Nifty PSU Bank index, the top gainer among sector indices, was up 8.5 per cent, as compared to a 0.69 rise in the Nifty50 index, while Nifty Bank and Nifty Private Bank indices were up 3 per cent and 1.6 per cent, respectively.

The Nifty PSU Bank index hit a 52-week high of 2,386 in the intra-day trade today, surpassing its previous high of 2,339, touched on February 7, 2020. The index was trading at its highest level since February 1, 2020 and has rallied 31 per cent on the NSE in the past five days, as compared to a 10 per cent gain in the benchmark index Nifty50.

Individually, the stock of SBI zoomed 15 per cent to hit a record high of Rs 408 on the NSE after the bank reported a good set of numbers for Q3FY21. The stock of the state-owned lender surpassed its previous high of Rs 374, touched on July 18, 2019.

In Q3FY21, SBI's asset quality picture, within guidance, came as a positive surprise for the Street. Also, Q3 slippages around Rs 2,073 crore and new restructuring in Q3 were at Rs 18,125 crore which also supported sentiment. This has brought stressed assets status, as on December 2020, at Rs 41,000 crore which is within the guided Rs 60,000 crore i.e. 2.5 per cent of loans as total stress including slippages.

Though reported gross non-performing assets (NPA) saw a decline of 51 bps QoQ to 4.77 per cent from 5.28 per cent, while net NPA ratio declined 36 bps QoQ to 1.23 per cent, actual proforma GNPA ratio would have been 5.44 per cent and NNPA ratio would be 1.81 per cent if Supreme Court standstill was unavailable. This is down from 5.88 per cent and 2.08 per cent proforma NPA, respectively in the previous quarter.

“Overall stress being contained at 2.5 per cent of loans as indicated earlier provides comfort reassuring investor confidence in SBI. Covid provisions at Rs 12,976 crore may be raised further in Q4FY21. With retail customers comprising government employees/salaried, the portfolio in this segment appears more resilient in these challenging times. Budget’s growth push provides visibility on capex and thereby credit growth pickup. NII growth and moderating provisions augur well for the bank’s earnings," ICICI Securities said in a result update.

Financial sector stocks, especially banks, have been in limelight since Finance Minister Nirmala Sitharaman proposed to divest stake in two PSBs while unveiling Budget 2021 proposals. That apart, the FM set aside Rs 20,000 crore for recapitalisation of PSBs. The government will introduce legislative amendments to privatise these banks in the current Budget session. Of the Rs 1.75 trillion divestment target set for the next fiscal, the government expects Rs 1 trillion to come from divestment of its stake in PSBs and financial institutions.

"With majority of asset quality stress recognised & many PSU Banks reasonably capitalised, it might be easier to attract investors. While these banks have lost share in lending, many of them have been able to grow retail deposits well, especially in the post-Covid era as they gained due to risk aversion," analysts at Jefferies said.

The government & Reserve Bank of India (RBI) have shown flexibility in allowing a foreign bank to bailout an Indian bank and build wider branch presence in India. With LVB, DBS added +500 branches to its India footprint versus just 35 earlier; it leap-frogged to being largest foreign bank in India by branches. Interest from other foreign banks, private banks or even NBFCs that aspire to scale-up in India can't be ruled-out, the foreign brokerage firm said in report.

Among the individual stocks, Indian Bank, Bank of Baroda, Canara Bank, Punjab National Bank and Bank of India have rallied between 25 per cent and 50 per cent in the past one week.