Shares of public sector banks (PSBs) were trading firm, gaining up to 3 per cent in Thursday’s intra-day trade in an otherwise range-bound market on expectations of steady Q4 performance in the near to medium term on the back of stable asset quality outlook. For the March quarter (Q4FY24), analysts expect PSU banks to report better earnings growth than private ones, led by lower credit cost.
State Bank of India (SBI), Canara Bank, Indian Overseas Bank, Bank of India, Uco Bank, Bank of Baroda, Central Bank of India and Punjab National Bank were trading 2 per cent to 3 per cent higher on the NSE.
At 12:49 pm; the Nifty PSU Bank index, the top gainer among sectoral indices, rose 2.2 per cent, as compared to 0.06 per cent decline in the Nifty 50 index.
Shares of SBI hit a new high of Rs 794, surging nearly 3 per cent in intra-day trade. The stock of the country's largest public sector lender surpassed its previous high of Rs 793.40 touched on March 7. The stock price of Canara Bank has rallied 3 per cent to Rs 614.95 in intra-day trade. It had hit a 52-week high of Rs 618.95 on April 8.
Last week, Fitch Ratings reaffirmed 'BBB-'ratings for SBI and Canara Bank with stable outlook.
Fitch expects GDP growth of 7 per cent in 2024 and 6.5 per cent in 2025, supported by investment prospects. The economy remains resilient as healthy business sentiment, buoyant financial markets and the government's capital spending buffered global economic headwinds and inflation. These factors are conducive for banks to sustain profitable business, provided risks are well-managed.
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Fitch Ratings said that SBI’s profitability has continued to improve, with the operating profit/risk-weighted asset (RWA) ratio reaching 2.6 per cent in 9MFY24, from 2.4 per cent in FY23. This was driven by a sharp drop in loan impairment charges, which more than offset a mild contraction in the net interest margin, higher wage and pension provisions and risk density. The rating agency expects profitability to be maintained around these levels to FY26.
For Canara Bank, Fitch notes a resurgence in loan growth, particularly in farm and corporate sectors. However, the bank exercises caution in retail lending compared to peers, maintaining a balanced approach.
Meanwhile, analysts at Elara Capital in Q4 quarterly preview said that banks are at an unusual junction wherein frontline names have underperformed. With outperformance by other private and mid-tier PSU banks, the valuation gap between mid-tier and frontline has narrowed.
The brokerage firm retains its neutral stance on banks; hereafter, the risk- reward may be tilted toward frontline peers. No significant asset quality challenges and better growth may ensure sustained rerating for PSU banks on earnings stability – with SBI being its top picks, analysts said.
While systemic liquidity has begun improving in the last couple of weeks, analysts at JM Financial Institutional Securities believe signaling by the Reserve Bank of India (RBI) on its inflation stance (and thus stance on liquidity) has emerged as a key driver for stock performance/valuations. PSU Banks remain key beneficiaries of such a tight liquidity environment (given lower LDRs and thus ability to sustain growth and protect margins), the brokerage firm said in Q4FY24 banking sector preview.
