PSU Bank Stocks on a Record-Breaking Rally

After 8 stocks recorded exceptional growth in the past year, the Nifty PSU Bank index is now poised for a significant breakthrough that could propel it to new all-time highs.

Compared to the closing level of 5,217 on Monday, the Nifty PSU Bank index is only 3% away from the closing peak of 5,375.8 achieved in November 2010. The recent surge in this index has pushed its 14-day Relative Strength Index (RSI) above 70, indicating strong upward momentum. Additionally, the index is currently trading above all its moving averages, signalling positive market sentiment.

Which banks have had record gains?

Over the past year, 8 government-owned banks have seen their stock prices more than double, generating substantial returns for investors. Among these, UCO Bank stands out as the top performer, with its stock price skyrocketing by an impressive 270%. Punjab and Sind Bank have also seen their stock price triple, while Central Bank of India, Bank of Maharashtra, Indian Overseas Bank, Union Bank of India, Bank of India, and Indian Bank have all delivered significant gains, making them attractive investment opportunities.

Why PSU banks have outperformed?

The outperformance of public sector banks compared to non-banking entities suggests that investors have grown more confident in public sector banks. This positive sentiment can be attributed to several factors, including the consolidation of public sector banks, increased autonomy in their business decisions, significant improvements in their asset quality, and enhanced operational performance.

In the June quarter, PSU banks pleasantly surprised investors with better-than-expected Net Interest Margins (NIMs) and Pre-Provision Operating Profit (PPoP), along with stable asset quality. NIM refers to the difference between interest income and interest expenses. PPoP refers to profit before accounting for loan loss provisions. While Indian and Canara Bank reported flat NIMs compared to the previous quarter, Union Bank saw an increase, whereas SBI and BoB disappointed with a decline of 26-27 basis points (bps) quarter-on-quarter (QoQ).

What’s the future?

Despite the recent strong rally in stock prices, most analysts do not consider the valuations of most PSU banks to be excessively high.

When looking at the bigger picture, it’s important to exercise caution when heavily investing in PSU banks for the longer term. This caution stems from the expectation that starting this quarter or the next, we may witness an increase in Non-Performing Assets (NPAs) and a tightening of profit margins, which was not the case in the last two quarters.

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