Public sector banks rally on fund-raising reports

MUMBAI: Shares of public sector banks rallied on Wednesday, outperforming benchmark indices, on media reports the government will consider proposals to raise funds from the market. State-owned lenders Indian Overseas Bank (IOB), Andhra Bank, Bank of Baroda and Allahabad Bank gained 4-6%.State Bank of India (SBI) rose 3%. The CNX PSU Bank Index gained 3.1%; the benchmark Nifty advanced 0.2%.

“Traders bought public sector banks because of the fund-raising news and the probability of re-rating of banks due to falling gsec (government securities) yield,“ said Rikesh Parikh, VP, markets strategy and equities, Motilal Oswal Financial Services.Declining yields on government securities will boost banks' bond portfolio.

The cabinet will consider state-run lend ers' proposal to raise funds from the market, Bloomberg reported on Wednesday.

Many public sector banks are currently rading at discounts to their book value. IOB, or instance, trades at a discount of 53% to its book value, while Andhra Bank, Allahabad Bank, United Bank and Indian Bank's mar ket price to book value is ket price to book value is about 40%.

“For PSU banks, the cycle will benefit their asset quality, governmentmandated opportunities may well arise to drive growth but frequent equity offerings may limit up side. However, given the very compelling valuations currently, we see significant upside for them,“ said Manish Karwa, analyst, Deutsche Bank.

Public sector banks have delivered higher earnings growth of 22% YoY compared with 17% of private banks in the quarter ended September. PSU banks also saw healthy core profitability growth of 18% versus 9% for private banks from the same period a year ago. “We believe current valuations of PSU banks make them more attractive in the near to medium term and prefer SBI, Union Bank and Bank of India,“ said Manish Chowdhary, analyst, IDFC Securities.

The return on assets (RoAs) of public sector banks have declined from 1-1.2% to 0.50.7% over the last five years, but this decline has largely been due to higher credit costs, lower margins and inferior cost structures.Analysts expect RoAs to improve to 0.8-0.9% but return on equity (RoE) will remain in the 12-15% bracket and capital requirement will remain large.

“While loan growth is likely to remain modest, lower interest rates in the medium term could be positive for earnings, especially for public sector banks,“ said Chowdhary.