Nifty PSU Bank index to catch up with broader market and the Nifty Bank index

Mumbai: PSU bank stocks are having their moment in the sun. After several months of underperformance, the Nifty PSU Bank index has started to play catch-up with the soaring valuations of the Nifty Bank index.

The Nifty PSU Bank index gained 32% in the past one month as investors took a re-look at these stocks’ valuations compared to their private sector counterparts. Consider this, the premium of the Nifty Bank index, which comprises mostly frontline private sector banks, narrowed to 1.6 times currently. This had expanded to over 2.7 times in end-October.

Also Read: Behind the anti-climactic end to Hollywood studios’ romance with Bollywood

This year, though, the Nifty Bank index underperformed the broader market due to covid-19 and the moratorium on loans. The lockdown meant to contain the pandemic also impacted bank loan collections and PSU banks were hit harder than others. That can be seen in the 27% loss in the Nifty PSU Bank index in 2020, compared to a 5% drop in the Bank Nifty index, and the 11% gain in the Nifty 50.

The rise in PSU bank stocks reflect the improvement in the economy and collection of loan repayments, but there is still some considerable ground to be covered.

“Most banks reported a significant improvement in collection efficiency above 90%. However, such disclosures lacked consistency in terms of calculation (inclusion of overdues in the denominator), and the reporting period,” said HDFC Securities in a recent note on PSU stocks.

Nevertheless, the brokerage expects gross non-performing loans for all banks to rise sharply to 5.7% in FY21 against 4.9% at present. If the uptrend persists in collection efficiency seen in the September quarter, not only would it pose an upside risk to earnings estimates, but it would also demonstrate the sector’s improved resilience to external shocks, said the HDFC Securities report cited above.

However, banks are also raising funds to buffer up equity capital to extend loans as the economic recovery seems. Punjab National Bank (PNB) said on 5 December it will hold a roadshow for the proposed 7,000 crore qualified institutional placement (QIP) issue. The bank will be participating again in the non-deal roadshow and meeting prospective investors on 7-8 December 2020, PNB said in a regulatory filing.

Besides, the government has also announced ­­a capital infusion of 20,000 crore for public sector banks (PSBs) for FY2021. The state-owned banks have also reported improvement in financials in the September quarter, aided to an extent by the Supreme Court order that restricted lenders from classifying certain loans as bad even if they turn non-performing.

In addition, the ability of PSBs (including PNB) to raise additional tier I (AT-I) bonds has also improved after they have proposed to set-off their accumulated losses against their share premium account, which could improve the bank’s ability to improve its tier I capital position, said a 20 November Icra report.

Analysts have also been upgrading PSU bank stocks. For instance, Jefferies India upgraded the stock of State Bank of India (SBI) to “buy” rating in early November. “With a broader recovery in the Indian economy and the ability of most lenders in recovering dues, the overhang of public services on SBI should recede,” said a 4 November Jefferies India report.

Interestingly, the valuation gap between private sector and the public sector continues to stay at high levels compared to the year-ago period. This gap is now at 1.63 times compared to a level of 0.61 times a year ago.

Subscribe to Mint Newsletters

* Enter a valid email

* Thank you for subscribing to our newsletter.

Source link
#Nifty #PSU #Bank #index #catch #broader #market #Nifty #Bank #index

Leave a Comment