Public sector unit bank stocks are seizing the spotlight after the first-quarter results.
State Bank of India, Punjab National Bank, and Bank of Baroda have been leading the Nifty Bank. Their net profits rose in Q1 FY24, compared to private peers. Stock prices of the banks have also advanced in the range of 11-93%, compared to a 14% rise in the index.
PNB's profits have quadrupled in a year, SBI's surged 2.78 times, while BOB reported an 87.70% year-on-year earnings growth. With the price-to-book ratios of the banks also inching higher — narrowing the gap compared to the private peers — here is what contributed to the PSU bank stock rally.
Key Metrics
Net Interest Margins
Margins have noted improvement across the board over the past year for SBI, PNB, and BOB; rising sequentially throughout the previous fiscal, before declining this quarter on a sequential basis. Management commentary characterised the April-June quarter as a seasonally weak quarter.
However, margins on average have increased by 0.29% across the three banks over the past year.
Domestic Advances
While SBI maintains its leadership in retail lending, it noted a slow growth of 0.29% in the corporate lending segment, quarter-on-quarter.
Corporate lending dominates the gross domestic advances of both PNB and BOB, with PNB showing a 5.16% uptick in the segment. BOB reported 1.73% growth in the category.
Slippages
Slippages are a crucial metric for PSU banks because they indicate the quality of the bank's loan portfolio. Slippages refer to loans that were previously performing well, but have now turned into non-performing assets, due to missed payments or defaults.
SBI reported an increase in slippages, up 1.4 times to Rs 7,659 crore QoQ, while PNB saw consistent reduction since Q1 FY23, down almost Rs 2,258 crore during the quarter. BOB reported an increase in slippages, which rose 9.37% on a sequential basis.
Stock Performance
In the past year, while SBI shares rose approximately 11%, PNB shares have close to doubled, rising 93%. This compares to a 14% increase in the Nifty Bank. BOB too, has outperformed the index by generating stock returns of a little over 60%.
Gross NPAs In Absolute Terms
Gross non-performing asset reflect the ability to manage and reduce bad loans. The sequential decrease in gross NPAs indicates that the banks are successfully recovering non-performing loans, which improves its asset quality.
Lower gross NPA also supports lending capacity, by reducing the need to allocate capital for provisioning for bad loans. Only SBI noted a increase in gross NPAs on a sequential basis this quarter, following the increase in slippages.
PNB's gross NPA ratio declined by 354 basis points to 7.73% versus 11.27% in Q1 FY23.
Valuation
The price-to-book ratio is crucial for PSU banks, as it indicates how the market values their assets relative to book value (assets-liabilities).
Upward trend in the ratio suggests growing investor confidence, on the back of improving financial prospects.
In fact, the gap between the P/B ratio of HDFC Bank Ltd., the largest private lender in the country, and of the PSU banks have been narrowing, suggesting the market is now rewarding the PSU stocks, based on the improvement in their net assets.
The improving asset quality trends are encouraging in lower tier such as PNB, which are expected to see faster normalisation of credit costs, said Rahul Malani, deputy vice president, research, Sharekhan Ltd., in a recent conversation with BQ Prime.
Lower slippage trends seen in FY23 will further continue in FY24, he said.
In terms of private banks, he says their view remain positive on ICICI Bank Ltd., Axis Bank Ltd. and IndusInd Bank Ltd.
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