PSU Bank Stocks Continue to Rally: Strong Credit Growth, Lower Valuations, and Asset Quality Improvement Key Drivers

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Public sector bank (PSU) stocks continued to rally on September 18, 2023, with the Nifty PSU Bank index recording a gain of 4%, extending its rally to the 10th session in the last 12 days. Indian Overseas Bank led the gains, surging 20%, while Punjab & Sind Bank, UCO Bank, and Central Bank of India also rose sharply by 13-16%.

The rally in PSU bank stocks is being driven by a number of factors, including:

  • Strong credit growth: Credit growth for scheduled commercial banks (SCBs) surged 15% as of March 2023, from 8.6% a year back. This is attributed to the pent-up demand factor as the normalisation of economic activity gained pace.
  • Relatively lower valuations: PSU bank stocks are still trading at relatively lower valuations compared to their private sector peers. This offers investors an attractive opportunity to invest in these stocks.
  • Commendable work on asset quality front: PSBs have made significant progress in improving their asset quality in recent years. The GNPA ratio of SCBs is likely to improve to 4.9% in September 2023 from 5% in September 2022.

Overall, the outlook for PSU bank stocks remains positive. Analysts expect further gains in the coming months, supported by strong credit growth, lower valuations, and improvement in asset quality.


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