Top 5 PSU Banks By Growth

The PSU banking sector is having its day in the sun.

The sector is out of the woods after several years, fiercely competing with the private sector.

This turnaround is visible in the quarter ending September 2022 results. Both major and minor PSU banks have performed exceedingly well, reporting spectacular profits.

State Bank of India reported a 74% YoY rise in net profit, while Bank of Baroda (BoB) posted a 59% YoY growth in net profit.

This massive expansion in profitability came largely from the loan growth in the corporate book. However, the government's monumental capex plans have also contributed to the same.

The stock prices of these banks (SBI and BoB) are also up by 28% and 117.8%, respectively, since the beginning of the year reflecting the stellar performance.

Canara Bank and Union Bank are not far behind, with their share price soaring by 51.3% and 93.4%, respectively.

With strong credit growth and cleaner balance sheets, the best bank stocks could see more upside in the future.

Here are five PSU banks that are growing faster than their peers.

#1 Union Bank

First on our list is the Union Bank of India.

The state-run lender's advances have grown over 3x in the last five years at a 5 Yr compounded annual growth rate (CAGR) of 18.2%. In addition to expanding its advances, the bank has improved its asset quality.

The net non-performing assets (NPAs) of the bank have plunged dramatically, from 3.8% in the financial year 2018 to 2.3% in 2022.

The company has also converted its losses into profits. It generated a profit of Rs 56 bn in 2022 after realising a loss of Rs 31 bn in the financial year 2020. This has propelled the lender's return on equity (RoE) which stands at 8.3% in the financial year 2022.

Union Bank Financial snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	-1021.2%	-43.8%	3.7%	-193.0%	84.2%
Advances Growth (%)	0.9%	2.8%	6.3%	86.8%	11.8%
Deposits Growth (%)	8.8%	1.8%	8.4%	104.6%	11.7%
Return on Equity(%)	-23.7%	-12.4%	-11.0%	6.3%	8.3%

Source: Ace Equity

This turnaround was led by the amalgamation scheme in April 2020 and the synergies arising from the same. After Union Bank's amalgamation with Corporation Bank and Andhra Bank, the combined entity became the fifth-largest PSU bank in terms of the branch network.

The company is optimistic about robust growth in the near future and is well-placed to capitalise on the pickup in the corporate credit cycle.

The stock price has doubled in the past year on the back of the strong performance reported over the same period. It is now trading at Rs 84, a P/BV of 0.92 times.

To know more about the bank, check out its financial factsheet and latest financial results.

#2 Canara Bank

Next on our list is Canara Bank.

The bank has doubled its advances in the last five years, reporting a 5-Yr CAGR of 15.5%. And while the advances have doubled, the NPAs have halved, suggesting a massive improvement in asset quality.

Canara Bank's NPAs have gone from a whopping 7.5% in the financial year 2018 to 2.7% in 2022.

The robust growth has enabled the lender to expand its margins, turning its losses into profits and boosting its return on equity. The average RoE in the past 5 years stands at 16.4%.

Canara Bank Financial snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	-431.3%	-113.4%	-469.6%	-233.6%	114.5%
Advances Growth (%)	11.6%	12.1%	1.0%	47.8%	10.1%
Deposits Growth (%)	6.0%	14.2%	4.4%	61.7%	7.5%
Return on Equity(%)	-13.7%	1.8%	-6.1%	6.1%	10.0%

Source: Ace Equity

The bank's increased focus on credit expansion drove this success.

Earlier this year, the company announced a plan to raise Rs 5 bn via the QIP route. This announcement was made after the lip-smacking performance during the year. It will help the bank capture all benefits from the country's increased credit demand.

The stock price has not been immune to the banks' stellar performance, up 50% since the beginning of the year. It now trades at Rs 305.

To know more about the bank, check out its financial factsheet and latest financial results.

#3 Bank of Baroda

Third on our list is Bank of Baroda (BOB).

The lender has doubled its advances in the last five years, registering a CAGR of 15.2%. But like its peers, the company has also managed to reduce its Net NPAs. They have decreased them by one-third, suggesting improved asset quality.

Over the years, the bank has leveraged its corporate relationships to enhance its loan book. It has achieved this while building a credible international presence.

At present, 10% of the total deposits held by the bank hail from its international operations.

This has led to the RoE growing by four times over the last four years and stands at 8.5% in the financial year ending 2022.

Bank of Baroda Financial snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	-207.6%	-156.9%	-13.3%	54.3%	429.6%
Advances Growth (%)	11.6%	10.6%	45.9%	2.4%	10.2%
Deposits Growth (%)	-1.6%	9.6%	46.2%	2.3%	8.0%
Return on Equity(%)	-4.6%	2.4%	1.6%	1.9%	8.8%

Source: Ace Equity

The CAR (capital adequacy ratio) has also been increasing steadily. It is at a desirable level of 15.8% in the financial year ending 2022, well over the regulatory norm of 12%. This outstanding performance, especially during the pandemic sets it apart from its other PSU peers.

The share price mirrors the lip-smacking performance and a well-capitalised balance sheet. In the past three years, BOB has, perhaps, been the best-performing banking stock, beating the public and the private sector giants.

Barring the pandemic effect, the stock price is up 3.5x, from Rs 41 in October 2020 to Rs 149 in October 2022.

To know more about the bank, check out its financial factsheet and latest financial results.

#4 Punjab National Bank (PNB)

Fourth on our list is Punjab National Bank.

The bank's advances have grown at a 5-Yr CAGR of 11.6%. Asset quality hasn't dwindled, as depicted in the net NPAs. The net NPAs have halved, falling from 11.2% in the financial year ending 2018 to 4.8% in the financial year ending 2022.

Despite an improvement in asset quality, it still falls well short of those of big lenders like SBI (0.8%) and HDFC Bank (0.5%).

Over the years, PNB has lost market share to private banks as they have ramped up their corporate business and leveraged their strong deposit franchises to offer lower rates.

However, the bank business has been recovering, which explains the growth in advances. It has turned the losses into profits in the past four years.

The return ratios have improved sharply, with RoE up from 0.7% in the financial year ending 2020 to 4.2% in 2022.

The CAR has been steadily increasing, up from 9.2% in the financial year ending 2018 to 14.5% in 2022. It is well above the regulatory norm of 12%.

Punjab National Bank Financial snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	-1,496.5%	-20.3%	-103.6%	492.4%	70.8%
Advances Growth (%)	3.4%	5.4%	3.1%	42.5%	8.0%
Deposits Growth (%)	3.0%	5.2%	4.2%	56.8%	3.6%
Return on Equity(%)	-32.5%	-25.0%	0.7%	3.0%	4.2%

Source: Ace Equity

The performance puts the lender on the fast track to hoovering up all the benefits from robust capital spending and the credit demand offtake.

The stock price was hit once the lender started losing market share. It underperformed its peers sharply, falling by over 81% in the last five years. However, the stock price has been stable in the past two years, rising from Rs 28 in October 2020 to Rs 39 in October 2022.

To know more about the bank, check out its financial factsheet and latest financial results.

#5 State Bank of India

Last on our list is the country's largest banking institution, the State Bank of India (SBI).

Despite the bank's troubled background, its financial situation has improved.

In the previous five years, SBI has increased its advances at a CAGR of 8.1%, and in the most recent year, its profit is up 15 times, recording a 3-Yr CAGR of 149%. But the robust growth has not affected the asset quality, as depicted by the net non-performing assets as a % of net advances (bad loans).

This ratio has improved dramatically, falling from 5.7% in the financial year ending 2018 to 1.02% in 2022. However, it is still below HDFC bank's which has never crossed 0.5%.

Strong return figures are a result of all that has happened. From -2.6% in the financial year 2018 to 11.6% in 2022, the RoE has increased dramatically.

State Bank of India Financial snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Net Profit Growth (%)	971.8%	-173.3%	492.3%	33.6%	49.7%
Advances Growth (%)	3.3%	13.6%	6.6%	5.3%	11.7%
Deposits Growth (%)	4.7%	8.0%	11.3%	13.5%	10.0%
Return on Equity(%)	-10.2%	-0.4%	0.0%	-1.9%	0.8%

Source: Ace Equity

The stock price reflects the stellar performance, making the stock one of the top performers in the past five years. It generated a return of 76.3%, leaving private sector big-wigs HDFC bank (65.5%) and Axis Bank (59.8%) behind.

The banking giant is confident of growth going forward led by the Government's capital outlay plans and an uptick in the credit demand across the country. Moreover, it is confident in generating sufficient capital organically to fund the growing business.

To know more about the bank, check out its financial factsheet and latest financial results.

In conclusion,

PSU banks are not in as much peril as they were back in 2018. Not only have they expanded their businesses, but also kept a check on bad loans. This wholesome growth makes their potential to keep lending at a healthy rate real.

With the government's capital expenditure programs to boost demand, there is a clear thrust towards reviving capital spending in infrastructure. This bodes well for the credit demand in the country over the near-term putting the banking in a sweet spot.

If the government manages to walk the talk, the well-capitalised PSU lenders can continue with their journey on the fast track to growth.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...