Top 5 PSU Bank Stocks for Wealth Growth
PSU banks enjoy the government’s backing and offer investors stability and security. These banks promote financial inclusion by extending services to underserved and rural areas. However, investors feared putting their money in a PSU bank a decade ago.
But not anymore! The scenario has completely reversed, and the PSU banks sector has risen tremendously. PSU banks have seen a fair share of ups and downs in the past two decades. When people talked about PSU banks, they almost always discussed how they (barring SBI) were loss-making old machinery with nothing but NPAs on their balance sheets.
However, the situation has changed, and the combined profits of all the PSU banks surpassed that of the private banks in the past year by almost 10.11%. The PSU sector has emerged victorious, with almost eight bank stocks delivering multi-bagger returns in the last year.
Achieving this transition from the status of a loss-making company to becoming one of the best companies on Dalal Street has not been a straightforward affair. The finance ministry and the RBI have had to take multiple measures to bring about this growth.
One of the very first steps the government undertook was the AQR (Asset Quality Review). This review involved delving deep into these banks’ balance sheets to assess the quality of their assets, i.e., the loans they had given out.
It turns out that most of the assets in PSU balance sheets were non-performing assets, and the banks had very low provisions to cover up these bad loans. Other issues that escalated the poor performance of the PSUs were the result of the IL&FS bank failure, along with a history of crony capitalism, which intensified the pain points in the history of public sector banks.
Having understood the problems, the government devised a solution they called the “4R strategy.”
The 1st R stands for Recognition, where the banks had to recognise their stressed assets and further categorise them based on the default severity.
The 2nd R stands for Restructuring, where banks offer borrowers lower interest rates and grace periods to repay their loans.
The 3rd R stands for Recovery, where banks took legal action against businesses. Borrowers had to file for bankruptcy, and the bank would seize their assets to recover the lost money.
The 4th R stands for Recapitalisation, which means more capital would be provided to them to operate in the market. That could be achieved through a merger between two banks, private equity investors, or by taking loans from other banks. That is one of the most crucial steps, as banks need capital to run their businesses.
Introducing the insolvency and bankruptcy code also led to faster loan recoveries.
Now that we have understood how PSU pounced back and delivered such massive returns let us identify the top PSU bank stocks worth considering for investment in 2024.
We will closely examine the details of these financial institutions, assess their financial stability, and explore why investors should invest in these companies.
State Bank of India
State Bank of India (SBI) is the biggest bank in India by the balance sheet size. It is India’s largest and oldest bank, spanning a rich history of over two centuries.
SBI holds a substantial market share of 22.84% in deposits and 19.69% in advances in India.
Over the past five years, the company has shown a profit growth of 76.1% CAGR in the last five years. SBI has also maintained a dividend payout ratio of 17.3%, reflecting its commitment to delivering value to its shareholders.
Bank of Baroda
Bank of Baroda is a prominent PSU bank renowned for its global presence. BOB’s international reach and commitment to technology-driven services make it an appealing choice for investors.
The Government of India holds a 63.97% stake in the bank. In FY19, the bank underwent a merger with Vijaya Bank and Dena Bank, solidifying its position as India’s third-largest PSU Bank.
BOB has achieved a profit growth of 57.6% CAGR over the last five years.
Indian Overseas Bank
Indian Overseas Bank had two primary goals: specialising in foreign exchange operations and providing overseas banking services.
They have delivered good profit growth of 18.5% CAGR over the last five years.
Indian Overseas Bank also has a presence abroad, with branches in Singapore, Colombo, Hong Kong, and Bangkok, serving customers internationally.
Union Bank of India
Union Bank of India is involved in various sectors like banking services, government business, merchant banking, agency business insurance, mutual funds, and wealth management.
Post-merger with Andhra Bank and Corporation Bank, Union Bank of India has garnered a substantial customer base exceeding 15 crore.
Over the last five years, the company has achieved strong profit growth at a CAGR of 29.5%.
Punjab National Bank
Punjab National Bank is India’s first Swadeshi bank. PNB offers various banking and financial services and has exhibited remarkable resilience and growth.
The bank’s branch count is 11,000 branches following the merger with OBC and United Bank of India. PNB is now India’s second-largest public sector bank in terms of branch network.
Government support through capital infusion has instilled confidence in these banks. The post-pandemic economic recovery has opened up lending opportunities and improved asset quality for PSU banks. They are expanding online and mobile banking services to stay competitive. Government policies, like bank mergers, aim to create more robust and efficient entities, positively impacting the performance of PSU banks.
The foremost step in investing in any PSU bank stock involves thoroughly analysing the company’s current market position and prospects. You must evaluate the overall performance, market share and competition surrounding the company.
Regardless of the PSU bank stock you intend to invest in, assess your risk tolerance and investment horizon. Check if the stock aligns with your financial capacity and goals. Once it matches your goals, include it in your investment portfolio.
Reference: https://www.smallcase.com/blog/best-psu-bank-stocks-to-buy-in-2023/
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