Why public sector bank stocks are on fire! UCO Bank Soars by 256%, Punjab & Sind Bank Records 195% Return

Smaller public sector banks (PSBs) are currently experiencing a remarkable surge in the stock market, with their percentage returns over the past year surpassing those of the previous decade. UCO Bank stands out as the top performer, boasting a staggering 256 percent return in the past year, followed closely by Punjab & Sind Bank, which delivered a robust 195 percent return. Bank of Maharashtra has seen its stock trade 144 percent higher, while Central Bank of India has witnessed a substantial 140 percent rise. Significantly, these smaller PSBs have outperformed their larger counterparts.

The impressive performance of these smaller banks has contributed to the Nifty PSU Bank index's remarkable 60 percent return in the past year. In contrast, the Nifty Private Bank index recorded a relatively modest increase of 9.59 percent, and the broader Nifty Bank Index saw a similar uptick of 9.38 percent.

There are several key factors driving the success of these smaller PSBs. Firstly, the Reserve Bank of India (RBI) initiated a cleanup process for these banks in 2015 through the Asset Quality Review (AQR). As a result of this exercise, the gross non-performing assets (NPAs) of PSU banks significantly decreased from 14.6 percent in March 2018 to 5.53 percent in December 2022. According to Chandan Sinha, former executive director of RBI and non-executive director of RBL Bank, "After the AQR, banks had more clarity on how to work around recovery and write-offs of bad loans."

Another pivotal development was the consolidation of 10 PSBs in 2020, leading to the formation of four larger and more robust banks. This consolidation played a crucial role in boosting the performance of PSBs.

In the stock market, one contributing factor to the outperformance of these banks is their historically low ownership by domestic and foreign investors. Investors tended to favor cleaner private sector banks, considering them safer options. However, as the growth of private sector banks slowed down, attention shifted towards the smaller PSU banks. For instance, UCO Bank, which posted a profit of Rs 167 crore in March 2021, surpassed expectations by recording a profit of Rs 223 crore in the June 2023 quarter. Additionally, the smaller free float of these banks has facilitated sharp upward movements in their stock prices.