Public sector banks outperform private peers; what's next?

Select public sector banks have outperformed their private-sector peers during the past one year due to improvement in balance sheets, hopes of divestment surrounding state-owned lenders and raising of funds through qualified institutional placement (QIP).

With a rally of 219%, Indian Bank emerged as the top gainer in the overall banking pack. Shares of the bank have jumped to Rs 139.65 on May 31 from Rs 43.75 in May last year. Bank of Maharashtra (up 184%), State Bank of India (up 165%), Bank of India (up 145%) and The Jammu & Kashmir Bank (up 144%) stood among other top gainers in the PSU pack.

Commenting on the outperformance, Siddhartha Khemka, Head-Retail Research, Motilal Oswal Financial Services, said: “Attractive valuation, divestment plans, economic recovery and fundraising have aided public sector lenders in the past one year.”

Sanjiv Bhasin, Director, IIFL Securities said falling non-performing assets and rising net interest margins supported PSU banks.

“We believe that credit book of lenders is likely to grow very sharply in the next 2-3 years and they will continue to outperform,” he said.

QIP route

A couple of lenders have either raised funds through QIPs or have announced that they are looking at that option amid the ongoing uncertainty due to the Covid pandemic. Market watchers believe that fundraising by banks is positive as it provides additional them additional capital and especially for PSUs it helps them to repair their balance sheet.

In the recent update, Canara Bank last week announced the capital raising plan for 2021-22 amounting up to Rs 9,000 crore by way of equity and debt instruments.

On the other hand, lenders like Union Bank of India and Punjab National Bank said they have raised Rs 1,447 crore and Rs 1,800 crore, respectively, through QIP. Shares of Punjab National Bank, Canara Bank and Union Bank of India have gained 58%, 92% and 47%, respectively, since May last year. Going with reports, Bank of Maharashtra and Indian Bank may announce their fundraising plans in the near term.

In the private lending space, IDFC First Bank gained the most 165% to Rs 58.50 during the past one year. It was followed by IndusInd Bank (up 158%), ICICI Bank (up 99%), Axis Bank (96%) and HDFC Bank (up 59%). Overall, the Nifty PSU Bank index has gained 115% during the past one year, while the Nifty Private Bank index has advanced 77%.

Outlook

Khemka of Motilal Oswal believes that banks will continue to play their pivotal role in the recovery of the economy.

“We believe that corporate banking space will do much better as retail got impacted due to lockdown and pandemic. We are bullish on ICICI Bank, Axis Bank and State Bank of India in the banking space,” he said.

On the other hand, HDFC Securities added that banks that raised equity capital during FY21 have built over 50 basis points higher provisioning cushion than their peers.

“We reiterate our preference for strong deposit franchises and maintain ICICI Bank and State Bank of India as our top largecap ideas. Amongst mid-sized banks, we prefer City Union Bank and Federal Bank although both banks may need to shore up their capital buffers to ride this wave out,” the brokerage said.