Why Investors Are Buying Government Owned Banking Shares?

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Investors are increasingly focusing on government owned banking shares, which are holding steady even in a falling markets.

 Why Investors Are Buying Government Owned Banking Shares?
Union Bank of India: Quotes, News
BSE 141.30BSE Quote3.95 (2.80%)
NSE 141.30NSE Quote3.9 (2.76%)
Andhra Bank: Quotes, News
BSE 59.60BSE Quote1.35 (2.27%)
NSE 59.60NSE Quote1.35 (2.27%)
Last week, on Wednesday, Thursday and Friday we had a solid dip in the Nifty, but government owned PSU banking shares remained resilient.

In fact, the Nifty fell a huge 100 points, but, most government banking stocks remained steady. Punjab National Bank, Bank of Baroda and State Bank of India gained ground.

In fact, on Friday private sector banks saw their shares falling with Axis Bank dropping a huge 3.13 per cent, while IndusInd Bank dropped 7 per cent.

Other private sector banks like ICICI Bank, HDFC Bank and Kotak Mahindra also had a bad session in trade.

Compared to this most of the PSU banking stocks have been holding steady. Here are few reasons for the same:

Highly undervalued when compared to private sector banks

You would end-up paying just 0.87 times price to book to value for a large cap government owned PSU bank like PNB or Bank of Baroda (0.7 times).

But, a HDFC Bank commands a price to book value of almost 9 times. These are horribly expensive, even if their asset quality is far superior to government owned banks.

Even in terms of price to earnings ratio and dividend yield, government owned banking shares are better priced.

Ready to ride economic growth

In the next couple of years at least the country is likely to see a strong rebound in growth. PSU Banks are likely to benefit more in terms of reduction in asset quality, since these are already high at PSU banks.

In the last one year stocks from the sector have been hammered largely on account of the fact that non performing assets have been woeful. But, with a rebound in growth this is likely to change quickly.

Another interest rate cut looming

It's highly possible that the Reserve Bank of India will cut interest rates going forward. In fact, CPI inflation and WPI inflation have been showing a remarkable downturn.

If there is another 50 basis points cut in interest rates this year it would augur well for the entire banking sector. This could push banking stocks higher.

Conclusion

All in all, if one has the patience to hold PSU banking stocks for the next one to two years, you could reap the benefits of the same.

In fact, stocks like Syndicate Bank, Union Bank of India and Bank of India are the ideal bets when it comes to PSU banking stocks.

GoodReturns.in

Read more about: pnb, union bank, bank shares
Story first published: Monday, April 20, 2015, 8:40 [IST]
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