Rally Up 🏧

CHART OF THE WEEK 📈

Traders and investors across the country have been getting excited about the Public Sector Undertaking bank stocks that have been rallying lately, with names like PSB and Union Bank giving returns in the triple digits this year.

Why did this rally even happen?

Upward cycle: India is currently witnessing very strong credit growth, which is even outpacing deposit growth. Credit expansion has been increasing MoM in 2022, with November recording around 17% YoY, compared to the October figures of around 13% YoY. The strength in credit despite a rate hike cycle has been leading to an overall improvement in metrics for the entire banking industry

Improving metrics: In line with the cycle, PSU Banks have been going through a cycle of improving growth, Net Interest Income, Net Interest Margins and asset quality - which all are signs of better revenue and profitability

Regulatory support: The government and the central bank have been focused on improving the quality of the Public Sector Banks. Consolidation initiatives by the government leading to mergers, and a clean-up of balance sheets, led by the RBI have improved operational and financial metrics

Inexpensive valuations: Having underperformed the private sector for years, Public Sector Banks have been trading at a deep discount to their private peers. Even the slightest improvement hence has been leading to a massive re-rating

After being underperformers for a whole decade, their balance sheet restructuring, massive market share in various sectors, and attractive valuation discounts have snapped their losing streak.

Our View 💡: Considering the current macroeconomic condition, PSU Banks might continue on this upward trajectory, as they attempt to bridge the gap from their previous losses. In fact, we’ve invested in Indian Overseas Bank that rallied 106% in just 6 months - one among many overachievers from our Value Migration portfolio!