State Bank of India (SBI) surprised analysts this quarter with a good set of numbers. While many analysts had expected the bank to improve asset quality, the improvement was really sharp.

The management commentary was not particularly encouraging with the Chairman saying the economy has yet to recover.

The net profits of the bank for the quarter ending March 31, 2015 jumped sharply to Rs 3742 crores from Rs 2910 crores. This is also a very good improvement.

While the economy has yet to rebound there are already signs of improvement in the asset quality of PSU banks. Bank of Baroda, SBI, Union Bank and Oriental Bank all saw their asset quality showing good improvement. Going forward should we see an improvement in the economy we could see an asset quality improvement and also profits growing.

Union Bank of India was another government bank that showed a solid improvement in performance. Asset quality at the gross level and the net level showed good improvement. The full year EPS of Union Bank for FY 2015 was Rs 27.67, taking the price to earnings ratio just under 6 times making it a good value pick.

The price to book value is also under 0.50 times. If you buy the stock now you would also be entitled to a Rs 6 per share dividend.

Should there be a sharp rebound in the economy these banks will show accelerated growth, particularly banks like Union Bank of India. It makes sense to accumulate these shares at the current levels.

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