PSU banks see sharp rebound; JPMorgan’s India bonds inclusion lifts sentiment

PSU bank shares made a robust comeback on September 22 after a bruising selloff in the previous session after JPMorgan’s decision to include Indian bonds in its emerging-market index boosted investor sentiment.

At 10.10 am, the Nifty PSU Bank index was trading 1.79 percent up at 5,128.25. All its 12 components were trading in the green, led by Union Bank of India (up 4.25 percent), Canara Bank (3.06 percent) and Indian Bank (2.69 percent).

JPMorgan Chase & Co said on September 22 it will add Indian government bonds to its benchmark emerging-market index (GBI-EM) starting June 28, 2024.

The decision has significant implications for India’s debt market and global investors, with India’s weight in the index limited to a maximum of 10 percent and eligible government bonds valued at $330 billion, analysts said.

Analysts also expect a significant boost to the domestic financial ecosystem if Indian government bonds are included in all three major EM bond indices — JP Morgan EM bond index, FTSE EM bond index, and Bloomberg Barclays EM bond index.

“we can estimate total flows to be at least $40-50 billion in the medium term (6-12 months) if IGBs get included in all three indices. This is a significant number because not only it provides an alternative source of financing for government borrowings, it opens up the space for corporate issuers as well as bringing the entire yield curve down significantly once all the inclusions are in place”, said Satyakam Gautam, Rates trader, ICICI Bank.

Gautam further added that as national banks’ balance sheets become more available, they can allocate more funds to the private sector. However, this also increases fiscal responsibility for the government, as these flows closely align with its fiscal decisions.

Potential Headwinds?

Some analysts are also urging caution with regard to the PSU bank space.

PSU banks have outperformed the market over the past few months but investors have to be careful of the mid and smallcap names in the segment, Ajay Bagga, Chairman of Elyments Platforms, said in an interview with Moneycontrol on September 21.

“The smaller PSU banks have low floating stock. In the absence of absorption capacity, they will fall as fast as they have risen when a block comes to the market,” warned Bagga.

PSU banks such as UCO Bank, Punjab & Sind Bank, and Bank of Maharashtra have over 95 percent government shareholding and are on the divestment radar.

“1-2 percent allocation to these turnaround stories is okay but it can’t be at 30 percent of your portfolio. That said, there are compelling arguments to look at larger PSU banks as the India story is strong, and lot of bad asset clean up has taken place over the past few years. They should do well,” Bagga said.

However, some experts are still bullish on the segment.

Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, told Moneycontrol in a recent interview that PSU banks are significantly undervalued compared to their private peers, while the private lenders are undervalued when compared to their intrinsic values,

The public and private sector banks have cleaned up their balance sheets and are ready to fund the growth of the Indian economy for the new capex cycle, he added.

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