Nifty PSU Bank index gains 4%; SBI, BOB, Canara Bank up over 3%

Shares of public sector banks were in focus with Nifty PSU Bank index gaining almost 4% as compared to 0.54% rise in the Nifty 50 index on Monday at 01:43 pm.

State Bank of India (SBI), Canara Bank, Bank of Baroda, Syndicate Bank, Union Bank of India and Union Bank of India from Nifty PSU Bank index were up more than 3%, while Indian Bank, Punjab National Bank (PNB), Oriental Bank of Commerce and Andhra Bank up in the range of 1% to 3% on the National Stock Exchange (NSE).

Nifty PSU Bank index had underperformed the market by falling 27% thus far in the calendar year 2018, against 5% decline in the benchmark index till Friday.

PSU banks have sold off 32% since the 25-January peak (Nifty down 10%) and retraced the entire post-recap gains. This was driven by a confluence of bad news – a large fraud at PNB, tighter provisioning norms from the Reserve Bank of India (RBI) and continued pressure from bond yields.

We are now agnostic between BOB and SBI – SBI has a better deposit profile and fewer challenges on the overseas book but BOB’s provisioning position is better, analysts at JP Morgan said in a report.

“State owned banks have witnessed sharp decline in their return ratios since FY14. They earned negative returns in FY16 and FY17 due to elevated levels of loan losses. This trend is unlikely to change in FY19 when most of the losses from impaired loans would be crystallised. Large bank recapitalisation programme would imply depressed levels of ROE despite decline in loan losses from FY20,” analyst at IIFL Institutional Equities said in recent sector update.

Valuation could improve with cyclical uptick in the financial performance of state owned banks but the constraints imposed on them through inadequate capitalisation and managerial autonomy have created a vicious negative feedback loop. State owned banks are likely to witness rapid market share decline and further erosion on their competitiveness, it added.