PSU bank stocks on a high with room to play

• India's inclusion into JP Morgan's Government Bond Index is good news for PSU bank stocks.
• PSU bank stocks have been rallying for the last three sessions in spite of broader markets slipping.
• There is buying interest because their valuations are not so demanding, experts say.
  

Indian public sector bank stocks have been rallying for the last three sessions – even as the broader markets as well as Nifty Bank have been experiencing pain on account of bearish Fed commentary.

The Nifty PSU Bank index has inched up by 15% in the last month, and is close to its 52-week high. Three of its 12 constituents – Union Bank, Indian Bank and Canara Bank – hit their 52-week high in the last session. The Indian Overseas Bank also saw a huge run up as well as profit booking last week.

Apart from the many existing triggers, these stocks were also buoyed by India's inclusion into JP Morgan's Government Bond Index – which led to a decline in bond yields. While India’s banking sector can gain as a whole from it, PSU banks in particular have a lot more room to stretch their legs, say experts.

“The inclusion into the bond market is good for the bond market and PSU banks,” Gaurav Dua, senior VP and head of capital market strategy at Sharekhan by BNP Paribas, told Business Insider India.

PSU banks have a larger part of bond holdings and it will help them more even though its a positive move for all banks, say experts. “They will soon see growth in treasury gains from the recent move,” says Shreyansh Shah, research analyst at StoxBox, told Business Insider India.


Source: NSE, Trendlyne

Reasons for the positive momentum

Even before the inclusion in the international index came in, PSU stocks were outliers after the market crashed all of last week. Investors bought into these stocks which have been seeing many positive triggers like the Reserve Bank of India (RBI) move to gradually unwind its mandate to scheduled banks to maintain an I-CRR or incremental cash reserve ratio of 10%.

Over the last few months, PSU banks have recorded good earnings reports with their networth improving and gross non-performing assets (NPAs) improving.

“The credit growth is on par with private banks and they are also getting into areas like business development and cross-selling like their private sector peers. They are also prompt in terms of provisioning. The current rally is justified,” says Shah.

Not booking profits, yet

In the 11-session rally that was seen in late August and early September, a lot of companies and sectors went into the ‘overvalued zone’ and had come under heavy profit booking during the subsequent crash. But experts see value in PSU banking stocks.

“There is buying interest because some PSU banks have better valuations, which are not so demanding. If you hold on to them, in 18-24 months, investors can make handsome money,” says Dua.

Most PSU banks saw double-digit credit growth in sectors like MSMEs, retail and housing and there is belief that corporate loans will also grow, due to government spending on infrastructure.

In the event of an interest rate cut, there could be another push for good growth in credit business, that will aid these banks and their investors.