Shares of public sector undertaking (PSU) banks were trading higher for a third straight day, with the Nifty PSU Bank index surging 6.5 per cent in the past two trading days on the National Stock Exchange (NSE).
At 11:01 AM, the Nifty PSU Bank index was the top performing sectoral gainer, and was up 2.6 per cent, as compared to 0.96 per cent rise in the Nifty50 index. In the past three days, the PSU Bank index has outperformed the market by surging 7 per cent, as compared to 3 per cent rise in the benchmark index. The rally comes amid stable operating environment, and expectations of strong earnings recovery in state-owned lenders.
State Bank of India (SBI), Punjab National Bank, Canara Bank, and Union Bank of India were up in the range of 3 per cent to 5 per cent. Indian Bank, meanwhile, hit 52-week high of Rs 210, gaining 3 per cent in the intra-day trade today. Bank of Baroda, too, surged 3.3 per cent to Rs 140.70, quoting close to its 52-week high level of Rs 143.45.
In a October 17 report, global brokerage Haitong initited coverage of the sector as it believes PSBs are now better placed with asset quality gradually healing, and relatively better balance sheet i.e. higher coverage ratios (in the range of ~65- 78 per cent), and CRAR — Capital to Risk (Weighted) Assets Ratio — in the range of 13.4-16.5 per cent, as on June-22.
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“This augurs well for improving growth trajectory, reducing LLPs, and return ratios over the next couple of years. Even as return ratios (RoAAs) are set to improve, they are expected to be below the previous peak (~1.3 per cent), and remain sub-optimal (sub 1 per cent). Subsequently, our assigned multiples are lower vs long term avg., reflective of the relatively subdued RoAA,”the report said.
On the earning front, analysts expect PSU banks to see treasury gains/reversal of treasury losses in the September quarter (Q2FY23) with moderation in yields. Thus, other income should witness a meaningful jump on a sequential basis.
PSU banks might see loan growth in-line with the system, while net interest income (NII) growth may be higher at 15 per cent year-on-year (YoY), analysts at Prabhudas Lilladher said in their Q2 earnings preview report.
The brokerage firm expects NIMs – net interest margin – to remain steady QoQ, around 3 per cent levels. Asset quality could improve QoQ with GNPA declining leading to controlled credit costs. Earnings are expected to be better as NII, and fee income improve with controlled opex, analysts said.
Meanwhile, shares of SBI were up 3 per cent at Rs 559, and have rallied 7 per cent in the past three trading days. The stock of the largest PSU bank was trading close to its record high level of Rs 578.50, which it had touched on September 15, 2022.
On October 4, Fitch Ratings has affirmed SBI’s long-term issuer default rating (IDR) at ‘BBB-‘ with stable outlook. The agency has also affirmed the bank’s Viability Rating (VR) at ‘bb’ and its Government Support Rating (GSR) of ‘bbb-‘.
Fitch expects Indias strong potential GDP growth of 7 per cent over the medium term and stable operating environment, despite some near-term inflationary pressures, to create moderate opportunities for banks to do profitable business. Our view is further aided by India’s large and diversified economy, high domestic consumption growth, and reasonable insulation from external risks, rating agency said.
SBI’s guidance of loan growth of over 15 per cent in the financial year ending March 2023 (FY23) highlights that growth appetite is gradually returning across segments, amid an economic recovery. Fitch expects the retail business to remain the key growth driver, with the bank showing cautious optimism towards corporate and SME segments as interest rates rise. The bank is more focused on credit quality as its moderate capitalisation compels it to optimise capital utilisation.
“We expect SBI’s impaired-loan ratio to continue to improve in FY23 (Q1FY23: 3.9 per cent), supported by lower fresh impaired loans and ongoing recoveries. A more meaningful unwinding of relief loans will likely test this trend in FY24, but loan impairment charges will likely remain below 1 per cent, provided there are no negative shocks from this pool of stressed Covid-19-affected loans. Specific provision cover on legacy impaired loans is 75 per cent while overdue loans (between 30-90 days) are limited at 0.24 per cent,” Fitch said in key rating drivers.
Separately, CARE Ratings said SBI’s credit costs are expected to remain moderate and profitability is expected to improve over the coming quarters as the bank has repayment of sizeable amount of its Available For Sale (AFS) investment portfolio to be redeemed which would reduce the mark-to-market (MTM) losses.
The bank’s home loan portfolio and ‘Xpress credit’ portfolio constitute 56 per cent and 25 per cent, respectively, of the bank’s retail loans. Although the bank has witnessed growth in the corporate advances, the bank’s focus on retail is expected to continue and drive growth in the near term, the rating agency said in rationale.