5 Powerful Reasons for Positive Investor Sentiment in Public Sector Banks

Banks

In the aftermath of the COVID-19 pandemic, public sector banks (PSBs) have experienced a notable upturn, characterized by record profits and enhanced asset quality. This resurgence has sparked renewed enthusiasm among investors. Many PSB stocks have taken the lead, outperforming their private sector counterparts.

Over the last year, the PSU Bank index has surged by an impressive 52 percent, in stark contrast to an average 12 percent gain in share prices among major private banks, as per data.

A few years ago, public sector banks were often viewed as underachievers, prompting investors to turn their attention to the more dynamic private sector banks. However, the narrative has undergone a profound shift.

In the past year alone, the PSU Bank index has surged by an impressive 52 percent, significantly outperforming major private banks that registered a modest 12 percent increase in their share prices. Notably, stocks of PSBs like UCO Bank and Punjab And Sind Bank have witnessed remarkable returns, posting gains of over 223.20 percent and 178.70 percent, respectively. Bank of Maharashtra and Central Bank of India have also displayed substantial growth, rising by 140.04 percent and 122.70 percent, respectively.

In a tumultuous market environment characterized by high interest rates and inflation, the Nifty PSU Bank Index, which tracks the performance of PSBs, has demonstrated exceptional resilience with its 52 percent surge over the past year, outstripping the Nifty Bank Index’s 12 percent gain over the same period.

For the week spanning September 8-15, the Nifty PSU Bank index surged by 7.2 percent, while the Nifty Private Bank index saw a more modest increase of nearly 2 percent.

This rebound in PSB stocks sharply contrasts with the varied performance of private sector banks. While HDFC Bank posted a respectable 9.28 percent return over the past year, it pales in comparison to the PSBs’ robust performance. Kotak Mahindra Bank faced challenges, registering a negative return of 5.93 percent. In contrast, ICICI Bank maintained stability with a return of 7.15 percent. Axis Bank and IndusInd Bank delivered more impressive results, with returns of 23.58 percent and 27.28 percent, respectively.

So, what has triggered this transformation?

Two key factors have been instrumental in this transformation. Firstly, the comprehensive effort to clean up bad loans, initiated in 2015 under the asset quality review (AQR) mandated by the Reserve Bank of India (RBI), proved to be a game-changer for state-run banks grappling with substantial bad loans. This endeavor led to a significant reduction in the gross NPAs of PSU banks, dropping from 14.6 percent in March 2018 to a more manageable 5.53 percent by December 2022.

The second pivotal factor was the mega-merger of public sector banks in 2020. Following this merger, these banks showcased notable improvements in profitability and asset quality, as indicated by a Moneycontrol analysis of their financial reports.

Chandan Sinha, former executive director of RBI and non-executive director at RBL Bank, underscored how the asset quality review and the mega-merger of PSBs streamlined operations. “After the AQR, banks had more clarity on how to work around recovery and write-offs of bad loans,” Sinha explained.

Sanjay Agarwal, Senior Director at Care Edge, further elaborated that the AQR effectively addressed the major issues facing PSBs. “After recognizing the problems, the government funded the banks, and the banks also raised capital. Banks also worked on improving recovery and due diligence, which further changed the ecosystem,” Agarwal noted.

The mega-merger of ten PSBs into four in April 2020 was part of a consolidation plan aimed at creating larger, more robust banks in the public sector. Under this initiative, Oriental Bank of Commerce and United Bank of India merged into Punjab National Bank; Syndicate Bank combined with Canara Bank; Allahabad Bank merged into Indian Bank; and Andhra Bank and Corporation Bank were consolidated into Union Bank of India. Following this exercise, banks reported record profits in their recent quarterly results.

Experts have pointed out that banks have adopted a diversified approach over the years, reducing stress on their portfolios. Policy decisions have also played a pivotal role in favoring banks, facilitating smoother credit growth and improved lending practices.

In December 2022, the government reported a significant improvement in the asset quality of PSBs, with gross NPAs declining from a peak of 14.6 percent in March 2018 to 5.53 percent in December 2022. This positive shift was attributed to the Asset Quality Review initiated by RBI in 2015, which revealed a high incidence of NPAs in banks. Following the AQR, banks took steps to transparently recognize and reclassify standard restructured advances as NPAs, making provisions for expected losses on such advances.

The practice of loan write-offs, coupled with some loan recovery efforts, has also contributed to PSBs reporting healthier asset quality figures. In the April-June FY24 quarter, PSBs wrote off Rs 27,303 crore. Experts have highlighted that banks write off loans to focus on overall business stability.

Challenges do loom on the horizon, including broader economic issues such as high inflation and policy rates that may impact the financial system and banks. However, PSBs have demonstrated resilience, and their deposit growth remains stable, even though credit growth has been relatively slow, presenting some challenges in this regard. Nevertheless, experts suggest that PSBs have navigated these challenges effectively and are positioned favorably in the evolving financial landscape.

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