PSB Stocks Make Merry after Proposal for Lower Govt Stake
Shares surge up to 12%, but it remains to be seen whether new govt will approve the proposals
Shares of state-owned banks rallied up to 12% on Wednesday after a Reserve Bank of India-appointed panel recommended that the government bring down its stake in these banks to below 50% to improve competitiveness and governance. The panel also proposed that government holding in state-owned banks be transferred to a new bank investment company and that RBI should act as the sole regulator for these banks. Analysts said investors may turn overweight on state-owned banks if these recommendations are accepted. The proposals can help public sector banks tide over capital constraints and turn profitable, they said. “If the recommendations are accepted, then there could be a major re-rating in PSU banks such as SBI, BoB and PNB,” said Pankaj Agarwal, analyst at Ambit Capital. “While economists in the BJP think-tank appear to be in favour of greater autonomy for PSU banks, it remains to be seen whether the new government will bite this bullet.” Most exit polls have predicted the BJP-led NDA forming the next government at the Centre. Bankex, the Bombay Stock Exchange’s banking index comprising mainly private sector lenders, gained 0.31% to 16,256 points on Wednesday. But shares of most state-owned banks outperformed the Bankex. While Indian Bank surged 12.49% to .` 140, Canara Bank rallied 10.68% to .` 333, Central Bank of India gained 10.37% to .` 61 and Bank of Baroda rose 9.22% to .` 958. Leading private sector lenders underperformed the state-owned banks. While HDFC Bank fell 1.52% at .` 775, Axis Bank slipped 0.68% at .` 1,638. With growing expectations that the recently-concluded general elections will throw up a stable government at the Centre, public sector banks provide a compelling investment opportunity. The country’s GDP growth is slated to steadily improve over the next couple of years after continuous deceleration for three years. The recent RBI measures have also been accommodative for banking expansion. Also, foreign institutional investors ownership in select PSU banks continues to remain at historic lows, which provide further upside for these banks, analysts said.
“Many PSU banks are trading at an attractive valuation of 0.6-0.7 times to their price-to-book value (P/B), and they can be good bargain at these levels,” said Kunj Bansal, ED & CIO at Centrum Wealth Management. “PSU bank stocks have gained attention in markets as the uncertainty over quarterly earnings is done for now.”
State-controlled lenders, which account for more than 70% of India’s outstanding loans, have historically been under-capitalised relative to privately-owned peers and this has hurt their lending activity, but recapitalisation of PSU banks is on the cards, analysts said.