psu bank: why PSU bank shares rise from the ashes

Investors on the hunt for multi-dredging often encounter wealth destroyers. When you talk about wealth destroyers, one of the names that pop into their minds is PSU banks!

Nifty50 and Nifty Private Bank indices have both outperformed the Nifty PSU bank by ~8x and ~11x, respectively. But the recent stock performance of PSU banks has been unprecedented. On a YTD basis, the Nifty PSU Bank Index is up about 34%, while the Nifty 50 and Nifty Private Bank Index gained only ~14.25% and ~2.2%, respectively.

There are many reasons for this change in the perception of PSU banks by the market. In this article, we’ll cover some of the important factors that catalyze this upward movement.

PSU banks have historically been plagued by poor asset quality due to their reckless lending. During the previous corporate credit cycle, ie from FY10-14, PSU banks reported high credit growth of ~17%.

This growth was largely due to the corporate book, especially in the infrastructure segment. RBI’s rushed lending, economic slowdown and asset quality assessment have opened Pandora’s box of gross NPAs.

Since FY18, however, the industry has witnessed a gradual improvement with gross NPAs falling to about ~6% in FY22, from the peaks of ~11% in FY18.

PSU banks have mainly focused on improving their business lending practices. This is evidenced by the fact that credit growth in the corporate segment has slowed and there has been a significant improvement in the creditworthiness profiles of corporates.

Cautious corporate lending certainly paid off as corporate slippages for the PSU banks in FY22 ranged between 0.1% and 3%. PSU banks outperformed their private counterparts in corporate slippage.

The retail segment, on the other hand, has never really bothered PSU banks as much of their retail segment comes from home loans.

The heavy business book that was once viewed as a drag on PSU banks will now boost their credit growth. Due to high public and private capex and increasing use of working capital limits, there is an increase in corporate credit. Since PSU banks have a wide range of corporate loans versus private banks, they will benefit the most.

The system credit has increased in recent quarters. The PSU banks were able to increase their market share during this period and generated better than expected growth. In Q1FY23, PSU banks increased their lending market share to 58.6%, an increase of 60 basis points.

Improving asset quality, accelerating credit growth, improving capital adequacy and lower provisioning are expected to contribute to PSU bank yield ratios. The market has already started discounting these positives, leading to an improvement in PSU bank’s valuations. They are expected to witness a further revaluation; however, valuations are expected to remain below previous peaks.

Technical outlook

image1 (4)ET CONTRIBUTIONS Technically, the index is firmly above all major exponential moving averages on the daily chart and has maintained its cycle of higher highs – higher lows – which appears to be a bullish setup.

However, as Nifty hovers around 18,000 levels, we’ve seen some hesitation at higher levels, but we don’t consider this a sign of concern. Traders are simply choosing to take some money off the table after seeing some significant gains in the past few weeks.

As for the levels, 17,750-17,700 are likely to absorb any decline immediately, while on the other hand, a decisive break from the immediate resistance of 18,200 could trigger a strong rally to 18,400 and beyond.

Leave a Comment