Reasons behind the surge in PSU banks stock
Upstox
2 min read • Updated: February 15, 2024, 11:32 PM
Summary
The Nifty PSU Bank index has risen by more than 72% in a year, in which every constituent of the index has delivered positive returns. Notably, banks like Indian Overseas Bank, Punjab National Bank, Punjab & Sind Bank, Central Bank of India, and Bank of Maharashtra have given returns ranging from 102% to 136%.
In the last one year, PSU banks have been in the spotlight as they have rewarded investors handsomely, owing to their strong financial performance and other supportive factors. Here are a few reasons why PSU banks are rallying:
Takeover of non-performing assets (NPAs) by bad banks
A backlog of non-performing assets (NPAs), or bad loans, was one of the biggest problems Indian banks were facing. The lack of revenue from these loans was straining the banks' coffers. In response, the government introduced "bad banks" with the aim of acquiring these NPAs from commercial banks. This has helped banks improve their margins and profitability.
Implementation of the Insolvency & Bankruptcy Code (IBC)
The IBC has aided banks in recovering debts more efficiently and attracting investments by bolstering confidence in the banking system.
Mergers of public sector banks
Mergers for several Public Sector Undertaking (PSU) banks, facilitated by the government, have resulted in improved operational efficiency and a wider reach. Consolidation is expected to further boost the competitiveness of PSU banks
Long-term considerations
PSU banks are poised to gain more from the government's emphasis on long-term infrastructure, electricity, and agricultural projects as PSU banks have historically had a greater exposure to these industries as compared to private banks.
Additionally, the government possesses over 90% of the shares in a number of PSU banks. The share prices have risen as a result of the supply-demand imbalance created by this concentrated holding. The low free float and shift in investor perception have led PSU banks to a strong rally in recent times.
Conclusion Compared to the wider Nifty Bank index, the PSU banks have had an incredible rise. Historical data show that several PSU banks are currently trading at record highs.