Nifty PSU Bank hit all time high; What’s driving the rally in PSU banking stocks? 

Shares of public sector banks witnessed a massive rally on Monday, pushing the NSE Nifty PSU Bank to over a 12-year high of 5,292.10 points, the highest level since November 09, 2010. Its market capitalization rose to an all-time high of ₹ 12.3 lakh crore, after adding ₹ 42,000 crore on Monday. 

The Nifty PSU Bank index settled 3.39 per cent higher on Monday, compared to a 0.29 per cent decline in Nifty 50. In fact, the Nifty PSU Bank index gained a massive 62.23 per cent on Monday, compared to a 14.25 per cent increase in the Nifty 50. 

All the 12 constituents of the index advanced, with Indian Overseas Bank, UCO Bank, Punjab & Sind Bank, and Central Bank of India leading the rally by rising more than 10 per cent each. Eleven out of the twelve constituents hit a 52-week high intraday, except the State Bank of India. 

Public Sector Banks were seen as laggards, a few years ago, leading investors to shun them and flock to the seemingly more attractive private sector banks. But the scenario has changed now. Many PSU Banks have delivered multibagger returns in the past year. These include UCO Bank (273.88 per cent), Punjab And Sind Bank (207.76 per cent), Bank of Maharashtra (152.80 per cent) and Central Bank of India (151.36 per cent). 

What fuelled the rally? 

The Reserve Bank of India had ordered the mega bad loan cleanup under the asset quality review (AQR) in 2015. This was a game changer for state-run banks with huge bad loans. As a result, the gross NPAs of PSU banks declined from 14.6 per cent in March 2018 to 5.53 per cent in December 2022. 

“After the AQR, banks had more clarity on how to work around recovery and write-offs of bad loans,” said Chandan Sinha, former executive director, RBI, and non-executive director, RBL Bank. He added that all the bad has gone and banks do not see pressure in their NPAs.” 

10 PSBs merged into four in April 2020. The consolidation plan created bigger, stronger banks in the public sector. Under the mega-merger, the Oriental Bank of Commerce and United Bank of India were merged into Punjab National Bank; Syndicate Bank into Canara Bank; Allahabad Bank into Indian Bank; and Andhra Bank and Corporation Bank was merged into Union Bank of India. 

“Banks’ credit has been growing smoothly and also lending practices have improved,” noted YV Reddy, former Reserve Bank of India (RBI) governor. He said that policy decisions have largely worked in favour of banks and that they have started to lend more. 

Experts said that write-offs, alongside some recovery of loans, have helped PSBs report healthy asset quality numbers.

According to a PTI report, PSBs posted stellar performance by registering a net profit of ₹34,774 crore for the first quarter ended June 2023, compared to ₹ 15,306 crores in the corresponding quarter last year. 

Written by Simran Bafna 

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