Why PSU bank stocks are up despite weak market

The public sector banks (PSBs) were in an upbeat mood on Tuesday and topped the gainers’ chart on Dalal Street, in an otherwise weak broader market. Bank of Baroda, Bank of India, and Punjab & Sind Bank hit their respective 52-week highs today, while index heavyweight State Bank of India (SBI) was trading near its record high after Morgan Stanley raised price targets of these PSU banks, expecting sustained growth in both operational and stock performance terms.

Nifty PSU Bank index rose as much as 1.8% to hit a new high of 4,278 in intraday trade, led by Bank of India, Union Bank of India, Bank of Baroda, UCO Bank, Indian Overseas Bank, Punjab National Bank, Central Bank of India, and Indian Bank, which gained in the range of 1-4% on the National Stock Exchange (NSE). In contrast, the Nifty 50 index was down 0.50% at 18,610 levels, while the BSE Sensex dropped nearly 300 points to 62,535.

Shares of SBI moved in a narrow range, hitting a high of 619.80 against the previous closing price of ₹617.30, while it touched a low ₹614.30 on the BSE. The index heavyweight trades close to its 52-week high of ₹622.70 touched on November 7, 2022. The largecap stock has risen 46% against its 52-week low of ₹425 on March 8, 2022.  

The PSU bank stocks were in limelight today after global brokerage house Morgan Stanley said in a report that the state-owned lenders are expected to continue their strong performance going ahead on the back of sustained loan growth, higher margins, and improving operating leverage.

"Over the past two years, Indian banks have seen sharp moderation in new NPL (Non-Performing Loan) formation, which, coupled with increased NPL coverage during COVID, has resulted in sharp moderation in credit costs. In recent quarters, this has been followed by sharp improvement in margins, helped by a rising rate cycle - higher rates, coupled with retail funded balance sheets and higher shares of repo-linked loans, have led to up-front margin expansion in the current cycle. Loan books have yet to be fully repriced, which implies that margins might expand further before, then moderate in F24," it said in a report.

The global research firm has maintained its ‘overweight’ rating on Bank of India, Bank of Baroda, and SBI; ‘equal-weight’ rating on PNB; and ‘underweight’ rating on Canara Bank. It has also raised target price on Bank of India to ₹125 from existing ₹95. For Bank of Baroda, the price target has been hiked to ₹220 from ₹195 estimated earlier. Similarly, the price target for PNB has been raised to ₹60 from ₹40, and ₹345 from ₹280 for Canara Bank. The target price for SBI has been upgraded to ₹715, an upside positional of 15% from the current market price.