PSU Bank stock price rally 75% from their yearly lows

In the last few weeks, the PSU banks in India have been the unlikely stars. For more than two years they just did not go anywhere. After the Q2 results, the PSU banking stocks have rallied on an average 73% from the lows of the year. But the movement in the last one month has been a lot more phenomenal. If you look at the Q2FY23 results, PSU banks have been among the big contributors to net profits with SBI reporting net profits higher than that of Reliance Industries. Here is a quick peek at how the PSU stocks have performed from their lows for the year; at the top is the Nifty PSU Banking Index.

Data Source: NSE

A quick reading tells you that 3 PSU banks viz. Union Bank, Bank of Baroda and Indian Bank have more than doubled from their recent lows. The lowest return from the lows is SBI with 42.6% with the banking index delivering 75.83% as of mid-day on Wednesday. What has driven this northward Journey. That is not all. In the last one month alone, the PSU banking index overall has rallied by 31% compared to a mere 2.8% rally on the Nifty Index. There have been some individual star performers in the last one month among PSU banks. For instance, banks like UCO Bank, Union Bank and BOI have delivered average returns of around 60% while BOM, IOB and Central Bank delivered 40% in the last one month.

The net result of this rally is that most of the PSU banking stocks are either trading at their 52-week highs or very close to their 52-week highs. What is the factor that has driven this sterling performance of PSU banks in the market. A number of things manifested in Q2FY23 results. Overall, the net interest income (NII) was sharply higher even as the NIMs or net interest margins expanded after a very long time. The PSU banks also got the benefit of sharply lower provisioning in the quarter. The rise in yields, improved their loan yields, even as their cost of funds did not see any significant change, putting them in a sweet spot. Even the gross NPAs of most of the PSU banks was sharply down on a yoy basis.

The cumulative numbers are quite impressive for Q2FY23. For instance, if you take the entire universe of PSU banks, then during the first half (H1FY23) ended September 2022, the net profits of these PSBs increased by 32% to Rs40,991 crore. That is not all. Even the most stressed banks saw a sharp jump in profits in the period. Let us turn to the quarterly numbers. For the quarter ended September 2022, the 12 PSU banks reported 50% higher net profits at Rs25,685 crore. Clearly, there has been an improvement in the business margins as well as well as in the NPA recoveries, which propelled profits in the quarter.

At the business level, it was the strong credit demand from retail and MSMEs combined with a gradual revival in corporate lending that boosted credit growth. But, PSU banks really benefited from quicker transmission of rate hikes on assets compared to liabilities. The spike in profits, fall in provisions and the sharp fall in GNPAs was a standard norm across most of the PSU banks. While PNB continued to be under pressure due to legacy issues, other PSU banks like BOB, SBI, Union Bank and Canara Bank gave a positive surprise on growth as well as on earnings.