Cinderella time! Will PSU bank stocks be first to be hit by midnight’s curse?

NEW DELHI: At October-end last year, when Kotak Mahindra Bank's MD and CEO Uday Kotak said at an analysts call that the industry is going through one of the most important Cinderella times of the credit cycle, little did anyone realise that PSU bank investors would have most of the fun at the party.

In the last 3 months alone, Nifty PSU Bank index is up over 45% with two of its constituents - UCO Bank and Punjab and Sind Bank - turning out to be money doublers in just one quarter.

Despite the narrative that state-owned banks are gradually losing market share to the much more aggressive private players, the year 2022 turned out to be the best year for PSU banks in the last ten years.


Out of the 12 stocks in the pack, 4 of them - Bank of Baroda, Indian Bank, Punjab & Sind Bank and UCO Bank - are multibaggers in the last one-year period as investors were impressed with not just the strong credit cycle but also the cleaning up of balance sheets after nearly a decade. Moreover, the high interest rate environment is also boosting their margins. PSU banks also ticked another box - cheap valuations.


Midnight’s curse in the offing for PSU banks?

After mindblowing returns in 2022, will PSU bank stocks go back to the shadows in the new year 2023? The answer to this question, by and large, depends on the credit cycle which is very closely linked to the terminal rates of interest and the external account situation of the country.

"This is a wonderful Cinderella time. (The) only point is we don’t know what time of the day it is. So, we are actually very conscious that this is still probably a little early in the Cinderella time, well before midnight, but we have to be ready that if and when that clock strikes we are in a good shape to be able to handle that time," billionaire banker Uday Kotak had told analysts in a call last year.

After the Indian banking system witnessed 17.4% YoY credit growth in the first fortnight of December, analysts expect the momentum to get stronger in Q4 unless it gets hit by a fresh Covid wave. "Also, it is likely to remain in the pink in FY24, given the healthy consumption trend and improving corporate credit growth," Emkay Global said.

If the macros weaken, analysts see slowdown as likely but asset quality risks appear to be lower.

Dalal Street trader and investor Vivek Bajaj, who runs StockEdge, says credit will slow down when interest rates go up to obnoxious levels. "PSU banks, being the most inefficient segment of the banking sector, will definitely see corrections. But efficiently managed banks like SBI and Bank of Baroda will continue to outperform other PSU banks," he said.

While traders may be willing to ride the momentum, long-term investors are finding it tough to digest the rally in one of the most ignored pockets of the market.

“No doubt, they had a good run. Their book value has gone up to 0.8x-0.9x. Balance sheets have been cleaned. But the question is if you have to raise capital from the market today, will you get a higher than book level value like any private bank? The answer is no. So these stocks are difficult to be a strategic growth bet in your portfolio," said a domestic mutual fund manager who didn't wish to be named.

For global brokerage firm Jefferies, SBI is its top PSU pick while domestic brokerage Dalal & Broacha said largecap banks (SBI, Canara Bank, Bank of Baroda) are still better-off given reasonable valuations and witnessing healthy deposits growth as well.

(With inputs from Ritesh Presswala and Vidya Sreedhar)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)