Mumbai: Shares of public sector banks surged as much as 11% Friday, reflecting their robust potential in the current market environment where many other stocks are trading at elevated valuations, and also helped by speculation that JPMorgan Chase is poised to incorporate India’s sovereign bonds into its indexes soon.
UCO Bank stock surged 9% to close at Rs 40.4, while Indian Overseas Bank rose 7% to close at ₹39.5. Punjab National Bank and Central Bank of India gained 5% each.
PSU banks are catching up on the valuations, and the discount between PSU and private banks could narrow further over the medium term, analysts said.
“Broadly, the segment is at more than 50% discount to private peers,” said Kaushik Dani, fund manager – PMS at Abans Investment Managers. “Confidence is also coming from the fact that earnings growth for PSU banks in the latest quarter has been strong with stable asset quality.”
On Friday, ET wrote that one of JP Morgan’s emerging market bond indices will have provisions for the impact of withholding taxes on international investors later this month, a step that could be a precursor for the long-awaited inclusion of India’s sovereign debt on a global index.
According to an estimate provided by Morgan Stanley, the inclusion of India in two out of three global bond indexes, including JPMorgan’s emerging market gauge, is projected to result in a substantial influx of $40 billion in capital.
JPMorgan is likely to disclose the outcomes of its index reviews by October. It had previously postponed the inclusion of Indian bonds, citing concerns related to a protracted registration process and various operational issues, including taxation matters.
The Nifty PSU Bank index rallied 27% in the last three months and 39% in the last six months compared to 8% and 19% rallies in the benchmark Nifty.
Analysts said PSU banks will play out as a structural story to revive the capex cycle.
“PSU banks have witnessed a dream run mainly on account of revival in interest income, better credit cost and favourable valuations,” said Vaibhav Shah, fund manager at Torus Oro PMS. “Recent credit growth numbers have shown signs of an uptick, and with a key thrust on infrastructure and manufacturing, we believe that will provide a long-term tailwind for PSU banks,” he said.
