What is Driving the PSU Bank Rally?

What is Driving the PSU Bank Rally?

Discover the intriguing forces propelling PSU bank stocks to new heights!

In the past week, the Nifty PSU Bank (Public Sector Undertaking) has been grabbing everyone’s attention thanks to an impressive comeback in the stocks of PSU banks. The Nifty PSU Index has been soaring high, outperforming the benchmark Nifty 50 by a significant 7.58% between September 12 and September 18, 2023.

Now, you might be wondering what is behind this remarkable rally, and the burning question is whether the PSU party will continue. 

Let’s explore the reasons and see what the future holds for PSU stocks.

What’s Happening?

The remarkable rally in the Nifty PSU Bank index, with many stocks reaching their 52-week highs, is indeed impressive. From August 21 to September 18, 2023, the PSU Bank index experienced a substantial rally of more than 14.05% in just one month.

Let’s delve into the performance of specific stocks during this one month. Notably, SBI (State Bank of India) surged by 5.47%, Central Bank of India Ltd witnessed an impressive increase of 47.54%, BOB (Bank of Baroda) saw a rally of 13.25%, Punjab and Sindh Bank recorded a remarkable 38.41% rally, and PNB (Punjab National Bank) also exhibited strong momentum with a 23.02% increase in its stock price. 

*Stock prices as of 18th September 2023.

The primary reason behind this rally is the favourable environment for the PSU banking sector. 

But which favourable environment are we talking about? Let’s understand. 

What is the Reason Behind The Rally?

Increasing NIIs

Public Sector Banks have seen a significant increase in their Net Interest Income (NII), growing by 26.3% compared to the previous year. This substantial growth has pushed the NII to a remarkable Rs 99,114 crore. This boost can be attributed to the benefits derived from higher lending rates, which have led to increased income from the interest charged on loans.

However, when we look at the numbers on a quarter-on-quarter basis, we observe a slight decrease of 0.8%.

Nevertheless, despite this minor dip in the short term, the year-on-year growth remains strong. This highlights the overall positive trend in the performance of public sector banks, showing that they are on a solid path of progress.

Net Profit Growth

Public-sector banks have delivered remarkable financial results in the first quarter, as reported by the Economic Times. They collectively achieved a staggering 124.8% year-on-year net profit increase, amounting to Rs 34,418 crore. This substantial growth in net profit reflects these banks’ strong performance and financial health.

Result of the Bad Loan Cleanup and Mergers

The mega bad-loan cleanup initiative, which started in 2015 following the asset quality review (AQR) mandated by the Reserve Bank of India (RBI), has been a game-changer for state-run banks. 

This exercise helped these banks tackle the burden of significant bad loans. Thanks to these efforts, the gross Non-Performing Assets (NPAs) of PSU banks decreased substantially, dropping from 14.6% in March 2018 to a much healthier 5.53% by December 2022.

But that’s not all; another significant factor is at play here. In 2020, we witnessed a major transformation through the merger of public sector banks. This move has positively impacted the profitability and asset quality of these banks. 

In fact, the recent quarterly results of these banks have been remarkable, with record profits reported, as we saw above.

In short, these two pivotal actions – the rigorous bad-loan cleanup and the mergers of public sector banks have played a substantial role in driving the remarkable performance we are witnessing in PSU bank stocks.

What’s Next?

The Reserve Bank of India’s report in December 2022 gave good news. It said that Indian banks have enough money and strength to handle any big economic problems that might come their way. With this in mind, we can eagerly await and see what the future holds for Public Sector Banks. 

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The companies mentioned are for information purposes only. This is not an investment advice.

*Disclaimer: https://tejimandi.com/disclaimer

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