Will Bull Run In PSU Banks Continue?

It's not easy to predict the market. But there are at least two positive factors to back the PSU banks, explains Tamal Bandyopadhyay.

These days, every investor is busy dissecting a three-letter word while taking exposure in the Indian stock market -- PSU. It stands for public sector undertaking.

Bank analysts have been looking at the pack of 12 PSU banks in a new light.

The reason is not difficult to find. Sherlock Holmes would have said, 'Elementary, my dear Watson.'

Whether or not Holmes ever said this to Watson is debatable. But no one questions Holmes' keen power of observation. He was a master of deductive reasoning.

Holmes was someone who could deduce or draw specific conclusions from general principles. The bank analysts are exactly doing that.

In the December quarter, seven of the 12 PSU banks had less than 1 per cent net non-performing assets (NPAs) and the rest below 2 per cent, with the highest being 1.8 per cent.

The State Bank of India, the nation's largest lender, had just 0.64 per cent net NPAs. When did we see such healthy balance sheets of PSU banks?

Eight of them have at least 40 per cent and up to 50 per cent low-cost current account savings account (CASA) deposits.

Incidentally, they offer far lower interest rates on savings bank deposits than most private banks, barring the very large ones.

How have their stocks performed in the past one year?

Till February 23, in the past one year, the broader BSE Sensex has risen 22.43 per cent and the 50-stock Nifty of the NSE Ltd 26.54 per cent.

The S&P BSE Bankex, which consists of 10 bank stocks, has been up 17.63 per cent; the Bank Nifty, an index of 12 most traded bank stocks, has risen by almost an identical margin -- 17.04 per cent.

But the Nifty PSU Bank index, which helps us gauge the performance of the public sector banks, has risen close to 95 per cent!

This is an index of the entire universe of the PSU bank stocks -- SBI, Bank of Baroda (BoB), Canara Bank, Punjab National Bank (PNB), Union Bank of India, Indian Bank, Bank of India, Bank of Maharashtra, Indian Overseas Bank (IOB), Central Bank of India, UCO Bank and Punjab & Sind Bank (P&S Bank).

The Bankex has just two PSU banks (SBI and BoB), one small finance bank (AU Small Finance Bank Ltd), one old private bank (Federal Bank Ltd) and six new private banks (HDFC Bank Ltd, ICICI Bank Ltd, Kotak Mahindra Bank Ltd, Axis Bank Ltd, IndusInd Bank Ltd and IDFC First Bank Ltd).

Of the 12 banks in the Bank Nifty, three are PSUs (SBI, BoB and PNB), one old private bank and a small finance bank (the two in Bankex) and seven new private banks (six of Bankex plus Bandhan Bank Ltd).

The data clearly says that the PSU banks' market performance is far better than their counterparts in the private sector.

Out of the 12 PSU banks, eight have given more than 100 per cent returns to investors over the past year, the highest being IOB (173 per cent).

PNB and Central Bank of India stocks have risen 166 per cent and 155 per cent, respectively.

Among PSU banks, P&S Bank, Bank of Maharashtra, UCO Bank, Union Bank and Canara Bank are the five others belonging to the 100 per cent+ stock returns club.

The SBI stock has given the least return -- 46 per cent. But that's not small if we compare it with the universe of listed private banks that outnumber their PSU peers.

Barring three small old private banks, none has given over 100 per cent returns in the past one year.

In fact, two of them -- the largest and a medium-sized bank -- have yielded negative returns. (I am not including small finance banks in the category of private banks.)

Among the large private banks, ICICI Bank stock has risen 26 per cent and Axis Bank stock 30 per cent. Others in this group that have done well are IDBI Bank Ltd (86 per cent), IDFC First Bank (54 per cent) and IndusInd Bank (38 per cent).

What's the key to the stellar performance of the PSU banks on the bourses?

Historically, PSU banks have been underperforming vis-a-vis their private counterparts.

From a valuation perspective, the so-called price-to-book value of a PSU bank stock or the market valuation to its book value was considered good till a year ago.

In other words, they were under-valued. Now, the investors are discovering value in such stocks as their balance sheets have gained strength with better asset quality, backed by risk management and underwriting skill.

Also, the PSU banks have shifted focus from growth to profitability.

Another factor working in their favour is the low floating stock or lack of liquidity.

For instance, only 1.75 per cent of P&S Bank stock is available to the public for buying.

The comparable figure for IOB is 3.62 per cent, UCO Bank 4.61 per cent and Central Bank of India 6.92 per cent.

The government's holding in such stocks is too high. Among 12 PSU banks, the government's holding in SBI is the least: 57.5 per cent. (Going by the SBI Act, it cannot drop below 55 per cent.)

Speculation on the likely privatisation of two PSU banks besides IDBI Bank (which has been on the drawing board for over a year now) has also been adding to the investors' excitement.

Will the bull run on the PSU bank turf continue?

It's not easy to predict the market. But there are at least two positive factors to back the PSU banks.

One, when the fight for deposits is intense, the wide branch network and customer base of such banks come in handy for mobilising low-cost CASA.

This also allows them to offer relatively modest interest rates for fixed deposits.

Also, PSU banks carry the perception of implicit government guarantee for deposits that encourages savers to keep money with them despite lower interest rates.

Second is the government plan for higher capital expenditure or capex in the next financial year.

While private capex is still a mirage, in the Interim Budget, Finance Minister Nirmala Sitharaman has raised the capex outlay for FY25 by 11.1 per cent to Rs 11.11 trillion -- 3.4 per cent of the gross domestic product.

Typically, PSU banks are more forthcoming than private banks for project financing.

Higher capex will be a big opportunity for them to shift focus from retail loans to long-term corporate loans. They can reap the benefits of this.

Of course, there is a caveat. They shouldn't mess up project appraisal and refrain from showing a herd mentality (joining the bandwagon for grabbing a project loan chunk without understanding the risks) -- something which they had indulged in the last decade.

One hopes that they would tread the path carefully -- particularly when the government is unlikely to put any pressure on PSU banks for infrastructure financing with blind eyes.

Tamal Bandyopadhyay, author of Roller Coaster: An Affair with Banking, is a senior advisor to the Jana Small Finance Bank Ltd.

Feature Presentation: Aslam Hunani/Rediff.com