Nifty PSU Bank index extends gains; shares of Bank of Baroda, SBI, PNB jump

Beaten-down banking stocks have staged a huge rebound over the past two weeks amid positive earnings surprises and hopes of reversal in the bad-loan cycle.

 

On Monday, the Nifty PSU Bank index, a gauge for the performance of state-owned bank shares, jumped 4.3 per cent, extending its two-week gain to 20 per cent.

 

Most public sector bank shares rallied, buoyed by a sharp jump in Bank of Baroda’s June-quarter profits. Shares of Bank of Baroda (BoB) gained 10.4 per cent, followed by State Bank of India (up 3.4 per cent) and Punjab National Bank (up 4.4 per cent).

 

“BoB posted an impressive first quarter with improvement in asset quality and stable core…We expect ‘growth with quality’ momentum to gain traction. Moreover, with up-fronting of stress recognition, we believe the bank’s earnings will gain momentum. We expect the stock to re-rate as visibility on earnings delivery improves,” a note by Edelweiss said.

 

The Bank Nifty gained 0.75 per cent, with shares of ICICI Bank rising 4.9 per cent and Axis Bank adding 2.85 per cent. HDFC Bank and Kotak Mahindra Bank declined 1.7 per cent and 0.5 per cent, respectively. Shares of ICICI Bank rallied after analysts revised its price target upwards on hopes of sharp improvement in return on equity.

 

Market players said investors could look at taking profits in recent winners such as HDFC Bank and Kotak Mahindra Bank, and deploy them towards PSU and corporate-facing private banks, whose stocks have corrected sharply.

 

The trend is clearly visible in the price movement. Since July 16, Bank of Baroda, Bank of India and Canara Bank rallied more than 30 per cent, while ICICI Bank and Axis Bank gained 14 per cent and 9 per cent, respectively. Shares of Kotak Mahindra Bank fell 7 per cent, and HDFC Bank shares traded flat during the same period.

 

“The PSU banking pack and corporate-centric private banks appear to be a tactical call from a portfolio perspective. The stress in the system has more or less peaked out. Slippages trend is likely to normalise over the next few quarters and cyclical recovery could allow banks having asset quality issues in corporate book to outperform over the next few year,” according to Bajrang Bafna and Rati J Pandit, analysts at Sunidhi Institutional Research.