Equity markets ended this week in the red, with the benchmark BSE Sensex closing down about 1 per cent. But, investors have been lapping up shares of public sector banks. Shares of India’s largest lender, State Bank of India (SBI), hit a life high of Rs 971.15 on November 6. Other state-owned lenders like Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and Union Bank also hit 52-week highs this month.
A key reason behind this renewed optimism among stock market investors towards PSU banks has been their strong earnings growth in the July-September quarter.
SBI, for instance, reported a 10 per cent year-on-year rise in quarterly profit at Rs 20,160 crore in the second quarter, while net interest income (NII) rose 3 per cent to Rs 42,985 crore. Overall, state-owned banks reported a record cumulative profit of Rs 49,456 crore in the July-September quarter, up 9 per cent from a year ago.
According to an analysis by CareEdge Ratings, PSBs reported a 3.6 per cent YoY rise in pre-provision operating profit, outperforming private sector banks. This, the credit ratings agency said, was supported by selective gains in treasury income from the sale of bank shares and NSDL listing gains, as well as overall controlled operating expenses across PSBs. Barring this impact, the pre-provision operating profit may have fallen around 2.5 per cent, it said.
NSDL had gone public in August and several banks had sold some of their shares held in India’s largest depository.
PSU banks outperform private lenders
Net interest margins across the banking sector have been under pressure, as yields have declined due to transmission of rate cuts, whereas deposit repricing is still underway; this timing mismatch between loan yields and deposit costs continued to weigh on spreads, according to the CAREEdge analysts.
However, the total income growth of PSU lenders has been better than that of private banks. While interest income for scheduled commercial banks rose 4.1 per cent, interest income for PSBs was up 7.3 per cent, alongside credit growth of 14.5 per cent, aided by retail and MSME segments, while other income benefited from selective treasury gains, according to the analysts.
Asset quality of PSBs has also been improving. SBI, for instance, reported gross NPA of 1.73 per cent in the July-September quarter, which was lower than the 1.83 per cent reported in April-June. Bullish on strong earnings prospects, several analysts this week raised their earnings estimates and price targets on SBI.
“SBI delivered yet another robust print, demonstrating strong earnings resilience, much better than peers. The discussion here on will be centred on NIM outcome—SBI has thus far managed it better than expectations and levers to sustain 1 per cent plus ROA (return on assets), as credit cost outcomes start to normalise, even as SBI seems to be holding well, thus far,” according to Prakhar Agarwal, banking analyst at Elara Securities.
Reports indicate that foreign institutional investors have raised their stakes in most public sector lenders in the September quarter. This renewed interest among investors, perhaps also comes from speculation that the government could lift the foreign ownership cap in PSU banks to 49 per cent from the current 20 per cent. If such a move were to happen, it could potentially drive billions of dollars in flows into PSU Banks.
Another reason behind renewed investor optimism towards PSBs has also been the talk that the government was planning to consolidate the sector further, in a bid to create large lenders. There has been chatter of late that four PSU banks could be merged. While there is no confirmation or exact timeline for this yet, Finance Minister Nirmala Sitharaman informed this week that work was underway for the consolidation of state-owned banks. She said that the centre was also discussing with the Reserve Bank on developing large banks.
Driven by the investor interest in the sector, the BSE PSU Banks index has surged over 21 per cent in the past three months, significantly outperforming the broader Sensex, which is up 3.2 per cent in the same period.