DECODING PSU BANKS RALLY

Jay Patel | 09 DEC 2022

SBI recorded robust net profit of RS. 13,264.52 For 2nd quarter 2022-23. While all 12 public sector banks recorded cumulative profits of Rs. 25,685 in Q2FY23. Cleaner books, higher growth capital and low NPA ratio is seen as healthy signal for PSU sector.

Indian Government's continuous efforts for improving public sector (PSU) banks Non-performing Assets (NPAs) and strengthening financial health of PSU's through various policies and incentives have shown tremendous tangible results across PSU sector. Currently, PSU Bank index is trading at its 52 week highest levels owing to strong results and higher net profits. We believe this rally will further sustain amid higher growth in advances and technological advancing operational performances. In the past few quarters, PSU banks displayed improvement in Net NPA ratios and strong CASA ratio as disposable income has grown in India with more saving habits among people.

SBI recorded robust net profit of RS. 13,264.52 For 2nd quarter 2022-23. While all 12 public sector banks recorded cumulative profits of Rs. 25,685 in Q2FY23. Cleaner books, higher growth capital and low NPA ratio is seen as healthy signal for PSU sector. In last few years, we have seen many factors contributing to the growth of PSU banks, let's touch some factors:

Cleaner Loan Book

Government has been managing PSU banks loan book cautiously. Recently, Government set up Bad Banks whose main purpose is to shift banks bad loans from their balance sheet to bad bank. This way banks can actively focus on their primary business areas rather than wasting capital and resources in NPA's recoveries. Through selling NPAs to bad bank, banks are left with higher capital buffer and can manage their liability well. We have noticed these effects in recent quarterly results where SBI lowered its net NPA level from 5.7% for FY18 to 0.8% quarter ending June 2022. Bank of Baroda's net NPA fell over one-third in last 5 years while Canara bank witnessed net NPA of 2.7% in 2022 vs. 7.5% in 2018.

Higher Government CAPEX Plan

Narendra Modi led BJP government have focused on growth and increasing capital expenditure to boost demand in economy. In last union budget, Finance minister Nirmala Sitharaman announced capital expenditure target of $7.5 trillion which not only provides fresh investment opportunities for private sector and SMEs but also cherish PSU banks as they get opportunity to disburse fresh loans to corporate and SMEs.

Loan Book Diversification

In recent scenario, PSU banks have become more diligent in disbursing fresh loans to overexposed corporate clients and vulnerable sectors. PSU have been following footprints of their private sectors peers through increasing focus on retail loan book and slowly lowering their wholesale book portion.PSU banks asset quality have shown signs of improvement through diversifying their loan book across corporate, retail and SME's. This measure has not only improved their NPA levels but increased their capitals through higher net profits.

Increase in MD and Directors Tenure

As per latest guideline issued on 17th November 2022, maximum tenure for directors and MD of PSU banks has been increased to 10 years. This measure is seemed very positive as MD's can work for companies' longer vision and continuity in leadership helps Company to perform well in the long run.

Improved Financial Ratios

Currently, India is witnessing highest ever credit growth in a decade and major credit growth can be attributed to higher loan disbursal to NBFC sector. CASA ratio, one of the leading financial indicator for banks have seen drastic improvements with rise in saving habits among people. Higher CASA ratio helps banks to raise funds at lower cost and thus improves net interest margin (NIM).

Public sector banks including SBI, BOB, Canara bank, PNB etc have seen recent interest rate hikes amid higher inflation and talent management is still a major issue that's facing PSU banks since long time. Lower valuation then private listed players, robust technological developments, increasing net profits and high loans and advances plays significant role in sustainable rally among listed PSU bank stocks.

Disclaimer: This article has been written by Jay Patel - Our Senior Research Analyst and originally published on Smart Investment website.