PSU banking stocks rise 100%

PSU banking stocks have offered substantial returns to investors in the last two months, with many of the stocks rallying almost 100% in less than eight weeks. Despite concerns of non performing assets, the shares of PSU banks were available at very attractive levels in December 2011 and early January 2012, which prompted a smart rally in these stocks.

For example. UCO Bank which hit a 52-week low of Rs 44.15 in early January 2012, has almost doubled in value and was traded at Rs 87.15 on February 17. Similarly, Dena Bank which hit a low of Rs 47.55 in early January has doubled and was traded at Rs 94.25 on February 17, 2012.

United Bank of India, which hit a low of Rs 45. 60 on December 30, 2011, has since rallied to Rs 83.50 on February 17, 2012. Syndicate Bank has rallied almost 80% in the last six weeks.

Interestingly, these PSU banks still remain undervalued, with many of the them trading below book value and at low price to earnings multiples.

Analysts believe that the concerns of non performing assets in the case of public sector banking stocks were overdone and hence investors saw substantial value in PSU banking stocks. The other reasons for the sharp rise in PSU banking stocks, were the expectations of lowering of interest rates by the Reserve Bank of India.

India's central bank already reduced the cash reserve ratio requirements and it is largely expected to start reducing interest rates.

Reduction in interest rates help banks improve net interest margins, as well as enable lower non performing assets. Besides, credit off-take also sees a substantial improvement.

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