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Shares of public sector banks (PSBs) were in demand on Friday as they rallied up to 7 per cent on the National Stock Exchange (NSE) in intra-day trade.
At 02:35 PM; Nifty PSU Bank index, the top gainer among sectoral indices, was up 3 per cent as compared to a 1.2 per cent rise in the Nifty 50.
Bank of India (BOI), Union Bank of India (UBI), Bank of Maharashtra, Punjab & Sind Bank and UCO Bank rallied between 4 per cent and 7 per cent.
Punjab National Bank (PNB), Indian Overseas Bank, Central Bank of India and State Bank of India (SBI) weree up in the range of 2 per cent to 3.5 per cent.
Asset quality for PSU banks has seen a steady recovery in the past few years toward the end of the corporate non-performing assets (NPA) cycle and even held up well through the Covid pandemic – contrary to the expectations of many.
This recovery cycle began with a declining trend in slippages, which was followed by declining Gross NPA ratios.
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Analysts at Kotak Institutional Equities (KIE) say credit costs are also declining as net NPA ratios for most PSU banks have converged to a level of about 1.0 per cent. The steady decline in credit cost has driven a steady improvement in RoE closer to mid-teen levels.
With increasing comfort in the outlook for asset quality and return ratios, these tier-2 PSU bank stocks saw a sharp rally recently and their valuation multiples have now converged closer to those of SBI, which traded at a valuation premium for a few years.
As a consequence, the investment thesis of favoring these inexpensive stocks has played out very well, KIE said in a report.
Among the individual stocks, UBI hit a 52-week high of Rs 132.50 on the back of a two-fold jump in trading volumes.
Last month, Crisil Ratings upgraded UBI’s bond ratings with stable outlook. The upgrade in rating is driven by sustained improvement in asset quality and profitability of the bank while capitalization and market position remained strong.
The rating continues to factor in the expectation of strong government support, both on an ongoing basis and in the event of distress, the rating agency said.
BOI too hit a 52-week high of Rs 129.90 on surging 8 per cent on the back of a three-fold jump in average trading volumes. In December, the bank had successfully raised Rs 4,500 crore via qualified institutional placement (QIP).
BOI said the bank intends to utilize the net proceeds towards augmenting the bank's tier I Capital to meet additional requirements on account of capital conservation buffer and to support growth plans and to enhance its business.
