PSU Bank Index up 2.5% on FinMin call for monetisation

Synopsis

The Nifty PSU Bank Index surged following the finance ministry's call for increased lending and subsidiary monetization through IPOs and stake sales, outperforming the broader banking sector. While gains may be limited due to bond yields and margin compression, analysts suggest PSU banks could outperform private peers in the near term, citing reasonable valuations and better CASA ratios.

Mumbai: The Nifty PSU Bank Index jumped more than 2.5% Monday after the finance ministry urged these lenders to offer more credit and monetise subsidiaries through IPOs and stake sales. They bucked the declines in the rest of the banking space.

The Nifty PSU Bank Index gained 2.7%, while the Bank Nifty and benchmark Nifty lost 0.2% and 0.5%, respectively.

All 12 stocks in the PSU Bank index closed higher. Bank of Maharashtra soared 5.3% while Punjab National Bank and Bank of Baroda rallied 3.9% and 3% respectively. Union Bank, Canara Bank, UCO Bank and Indian Bank gained over 2.5% each. Analysts said the gains could be limited but PSU Banks could outperform its private peers in the near term.

"Although it was known, recent nudge to public sector lenders by finance minister to monetise their subsidiaries via IPOs and stake sales led to uptick in these stocks as the managements of these banks are expected to start working on the same," said Kaitav Shah, Lead BFSI Analyst, Anand Rathi Institutional Equities. "SBI is our top stock pick as it has multiple catalysts in place and its fund-raising would be book accretive."

Shah said that the gains could fizzle out as it was largely a knee jerk reaction as bond yields have hardened post the interest rate cut and net interest margin compression is also anticipated. So far this year, the Nifty PSU Bank Index gained 10.1% while the benchmark Nifty index rose 7.5% in the same period.

"The finance minister urged PSU banks to raise credit growth which was perceived positively," said Vishal Narnolia, AVP research, ICICI Securities. "PSU Banks can outperform private peers in the near term due to limited margin compression given their better Current Account Savings Account (CASA) ratio and lower Credit-Deposit (CD) ratio."

Narnolia said that the valuations in the sector are also reasonable and there is room for further upside potential in these stocks in the near-term. Shrikant Chouhan, head of research, Kotak Securities said despite encouraging results, investors should not be swayed solely by short-term momentum and has a positive view on State Bank of India and Union Bank of India.

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