Up to 190% jump since March 2020! Is it still a good time to invest in PSU banks?
Of late, ace equity investor Rakesh Jhunjhunwala bought a 1.59% stake in Canara Bank.
Public sector banks have been on the radar in the stock market after big investors and institutional players showed interest in select lenders in the recent past. Already, they have delivered a handsome return to investors amid the ongoing rally since March 2020. Take this: With a rally of nearly 190%, Indian Bank has emerged as the top gainer in the list. Shares of the bank have advanced to Rs 123.50 on August 25, 2021 from Rs 42.60 in March last year.
Market watchers believe that Indian Bank with its healthy liability franchise, low cost of funds and compelling valuations has now begun to witness synergies post its merger with Allahabad Bank. The bank offers a wide range of services including foreign currency banking and specialised overseas branches in Chennai, Bangalore and Mumbai exclusively handling foreign exchange transactions. The bank has different lending verticals including retail, agriculture, MSME and corporate.
Likewise, Indian Overseas Bank (up 178%), The Jammu & Kashmir Bank (up 174%), State Bank of India (up 122%), Bank of Maharashtra (up 104%) and Bank of India (up 100%) have also more than doubled investors wealth during the same period.
Factors that supported
AK Prabhakar, head of research, IDBI Captial Markets told Money9.com that improvement in non-performing assets (NPA), attractive valuations and return of profits mainly supported PSU banks. “At current valuation, big investors are showing interest and QIB are also getting a good response,” he said.
On the other hand, independent market analyst Ambareesh Baliga said, “Recoveries and recapitalisation helped PSU banks to deliver a robust return in the recent past.”
The government proposed to fix their legacy bad loan problems through a bad bank in February. PSU Banks posted a profit of Rs 32,249 crore in FY21 against losses in the previous three financial years.
Commenting on the June quarter results, ICICI Securities said, “PSU banks on overall basis outperformed private counterparts on asset quality, profitability but lost market share in terms of business (loans + deposits).”
Of late, ace equity investor Rakesh Jhunjhunwala bought a 1.59% stake in Canara Bank. Besides, state-owned lender Canara Bank on August 25 said it has raised Rs 2,500 crore through the qualified institutional placement (QIP) route. The QIP was fully subscribed and saw a strong response from foreign as well as from domestic qualified institutional buyers (QIBs) including Life Insurance Corporation of India. Shares of Canara Bank have gained 74% since March 2020.
What’s next?
Other public sector lenders including Central Bank of India, Punjab & Sind Bank, Bank of Baroda, UCO Bank, Union Bank of India and Punjab National Bank have gained between 10%-70% during the same period.
On asking is it the right time to invest in PSU Bank after the run-up? Prabhakar said that PSU lenders at current valuations are a ‘steal’ supported by attractive valuations and mergers which are going to benefit. He is bullish on SBI and Canara Bank from an investment perspective.
Brokerage LKP Securities is positive on Indian Bank with a target price of Rs 170. “We believe, the bank shall emerge stronger by the end of FY22 since Q1FY22 earnings have shown early signs of recovery. The credit quality recovery in Q1FY22 was meaningful as absolute GNPA inched down (2% sequentially) driven by healthy up-gradation (14x of 4QFY21),” the brokerage said.