Nifty PSU Bank index rises 2% after Bank of Baroda posts steady Q2 numbers

Analysts at Elara Capital said no significant asset quality challenges and steady growth may ensure rerating for some PSU banks (after recent correction) on earnings stability.

Public sector banks shine: Shares of public sector banks (PSBs) have rallied up to 4 per cent on the National Stock Exchange (NSE) in Friday’s intra-day trade after Bank of Baroda (BOB) reported steady provisional numbers for the July to September quarter of financial year 2024-25 (Q2FY25).

Besides BOB, share price of Indian Bank, Canara Bank, Punjab National Bank and State Bank of India (SBI) were also trading higher between 2-4 per cent each. At 12:06 PM, Nifty PSU Bank index was the top gainer among sectoral indices, and was up 1.9 per cent, as compared to 0.68 per cent rise in the Nifty50. 

The shares of BoB rallied 4 per cent to Rs 255.33 a piece after the bank said its global advances grew 11.6 per cent year-on-year (Y-o-Y) (4.84 per cent sequentially) to Rs 11.43 trillion in Q2FY25. Domestic advances rose by 12.51 per cent Y-o-Y (4.57 per cent quarter-on-quarter) to Rs 9.39 trillion, driven by a 19.95 per cent Y-o-Y increase in domestic retail advances to Rs 2.32 trillion.

On the other hand, YES Bank improved the share of low cost money –current and savings accounts (CASA) – in total deposits to 32 per cent in Q2FY25 from 29.4 per cent a year ago, it said on Thursday. Sequentially, CASA share improved from 30.8 per cent at the end of June 2024. CASA deposits grew 28.4 per cent Y-o-Y, higher than 18.3 per cent for overall deposits, said the private bank in a BSE filing. The Mumbai-based lender reported a 13.1 per cent Y-o-Y growth in advances at the end of September 2024.

Analysts at Elara Capital believe the risk-reward is sharply tilted toward frontline peers. No significant asset quality challenges and steady growth may ensure rerating for some PSU banks (after recent correction) on earnings stability.

For SBI, the Elara Capital expects strong loan growth of >15 per cent Y-o-Y, supported by growth in the retail and Small and medium-sized enterprises (SME) segments. Analysts expect NIM to be lower, down 5bp Q-o-Q, dragged by penal interest change. Asset quality, meanwhile, will sustain with curtailed slippages. 

However, better recovery and upgrade will help sustain benefits on GNPL. With strong coverage levels, we expect credit cost to be curtailed. The caveat here will be couple of corporate houses accounts, if they get downgraded, then there could be higher impact. The management commentary on return on assets (ROA) sustainability and capital raise will be key to watch for, analysts said.

Those at Motilal Oswal Financial Services (MOFSL) estimate PSBs to report moderate earnings growth of 17.2 per cent Y-o-Y, a decline of 0.6 per cent Q-o-Q in Q2FY25. The net interest income (NII) growth is also likely to remain moderate at about 6 per cent Y-o-Y as margins maintain a marginal downward bias. Accordingly, the brokerage firm estimate PSBs’ earnings to clock a 15 per cent compound annual growth rate (CAGR) over FY24-26.

MOFSL in Q2 results preview said, it expect asset quality to remain broadly stable amid an improving borrower profile and a low SMA (Special Mention Account) pool, keeping slippages under control. However, with rising delinquencies in unsecured lending, the outlook for asset quality will be closely monitored over the coming quarters. Besides, the ECL (expected credit loss) provisioning requirement for the next fiscal may also act as an overhang on sector performance, it added.

While advance growth remains steady for the banks, composition of incremental credit remains watchful to gauge margin trajectory, brokerage firm ICICI Securities said in a note.