PSU banks rally; Oriental Bank, Syndicate Bank up over 5% in subdued market

Shares of public sector banks (PSBs) were in focus in otherwise subdued market, with Nifty PSU Bank index gaining 2 per cent on the National Stock Exchange (NSE), as bond yields fell ahead of Reserve Bank of India (RBI's) monetary policy decision.

The 10-year government bond yield ended below 7 per cent for the first time since November 2017, which can provide cushion for treasury income in Q1FY20.

Among the individual stocks, Oriental Bank of Commerce and Syndicate Bank were up more than 5 per cent each on the NSE. Union Bank of India, Allahabad Bank, Bank of India, Canara Bank, Punjab National Bank and Bank of Baroda were up 2 per cent to 4 per cent.

At 10:55 am, the Nifty PSU Bank index, the largest gainer among sectoral indices, was up 1.8 per cent, as compared to a 0.35 per cent decline in the Nifty 50 index. Nifty Bank and Nifty Private Bank indices were down 0.20 per cent each.

“The first quarter of current financial year 2019-20 is punctuated by the results of general elections. Once this short-term uncertainty is cleared, the course of policy direction will also be visible. With monetary policy already accommodative, a low inflation coupled with manageable fiscal position, the future outlook of growth is positive. The risk in banking sector is likely to ebb with the resolution of large ticket IBC cases. This will create room for business expansion and structural transformation of Banks,” the State Bank of India (SBI) said in annual report.

“With interest rates expected to decline in next one year and 45.4 per cent of the SBI’s investments in available for sale (AFS) and modified duration of 2.62, some more benefit on treasury side is expected to come in,” analysts at Sunidhi Securities & Finance said in a report. The brokerage firm has ‘outperform’ rating on SBI with target price of Rs 429 per share.

IIFL Securities believes PSU Banks are likely to report better earnings going ahead driven by moderation in slippages leading to lower credit costs, improving margins through better income recognition and improving loan growth.

“For PSBs, moderation in credit costs and write-backs from large NCLT recoveries are expected to aid FY20E earning, though ageing related provisions could continue for some. However, we remain cautious on PSBs (Ex-SBI) as we expect subdued loan growth and weak spreads to limit expansion in RoAs. Moreover, while concerns in the corporate book are largely factored, slippages from agri and SME portfolio remain elevated for many. Also, further extension in resolution timelines for IBC based recoveries remains a risk to earnings,” analysts at Reliance Securities said banking sector update.

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