PSU Bank Stocks Surge 13% As Bulls Return to D-Street; Should you Buy?

After declining almost 10 per cent in the last session due to Covid fears, Fed rate hike, PSU bank stocks rebounded, gaining up to 13 per cent in Monday’s trade.

Indian Overseas Bank (up 12.21 per cent), Union Bank of India (up 10.73 per cent), Bank of India (up 9.04 per cent), Bank of Maharashtra (up 8.05 per cent), Punjab National Bank (up 6.04 per cent), Indian Bank (up 5.76 per cent), UCO Bank (up 5.08 per cent), Central Bank of India (up 4.59 per cent), Bank of Baroda (up 3.22 per cent) and Canara Bank (up 2.9 per cent) advanced.

On the other hand, Punjab & Sind Bank (down 1.75 per cent), edged lower.

PSU Banks Outshine in 2022

In 2022, while there were broad-based gains in the banking pack, it was public sector banks that stole the show. State-owned banks gave their best-ever gains in at least a decade. The Nifty PSU Bank index has risen nearly 63% in 2022, the highest ever in a decade.

Should you Invest or Book Profits?

Money managers do expect the banking pack to remain on the top of the betting list in 2023 as a recovery in the domestic economy will see the sector leading earnings growth for India Inc.

In Q2, most PSU banks reported stellar earnings coupled with improvements in asset quality and rising credit growth numbers. Besides, state-owned banks also reported healthy NIMs, which analysts believe might be sustainable for another quarter as rising deposit rate hikes may be passed with a lag.

“PSU banks were up 74% in the last six months. Post the phase of significantly higher GNPA, treasury MTM losses, lower capital & sub-par growth, there has been a turnaround with comfort on asset quality; reversal of treasury losses, credit growth pick-up and just adequate capital position for most of them,” domestic brokerage firm ICICI Direct said.

“With a recovery in growth and stable asset quality, PSU banks are set for a further re-rating. Large PSU banks like SBI, BoB, Canara Bank are are trading at ~0.8-1x P/BV, which paves the way for a further re-rating as peak valuations remain at ~1.2-1.5x in FY12-14. We remain positive on PSU banks, with upsides expected to continue in the medium term horizon,” it said.

Ravi Singhal-CEO GCL, said: “As we can see, the market has bounced back exactly from the Cup and Holder pattern breakout 41,600 in November month. It has now been tested, so we believe one way can come from here for new high stop loss at 41,400.”

Bank Nifty Outlook

Some analysts however remain cautious that gains in Indian markets could be capped in the short to medium term due to high valuations and the probability of a recession in the US.

“In India, the bank index, and within the bank index the PSU bank segment, is the strongest segment and this can continue to remain resilient. HDFC twins exhibit strength. The recovery in the IT segment has some more steam to go. The resumption of FII buying is another positive. However, Nifty is unlikely to break out of the 18,400-18,800 range and sustain at higher levels. High valuations are likely to cap the rally,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

“We expect this outperformance for banks and the tailwind for the sector to continue for 2023. In the short term, after yesterday’s inflation print in the US, there is an expectation in some quarters that the US Fed might turn less hawkish in the upcoming policy, which will support the markets,” said Nishit Master, Portfolio Manager, Axis Securities PMS.

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