This Is One Way To Play PSU Bank Space

Stock markets are seeing a new-found confidence thanks in good measure to the clean-up undertaken in the public-bank arena. For a long time, the bad-loan problem dogging public-sector banks had been weighing on markets as investors were unable to put a finger on the extent of the problem.

However, the strengthening of public-sector banks' balance-sheets over the last year, which recognized more NPAs and provided for them, has helped pull public-sector banking out of the rut it had dug itself into, and up into the purchasing periphery of savvy investors.

Little surprise, then, that the public-sector-bank index is in a tearing hurry. Ever since this post-Budget rally took off, the public-sector-bank index has outstripped the frontline Nifty and the popular Bank Nifty, returning a whopping 62.5 per cent since March 1, compared to the Nifty's 28 percent, and the Bank Nifty's 47 percent.

The signs are evident of a further fillip in momentum here, given that these stocks are still going at economical valuations - around 8-10 times earnings. Investors could continue to accumulate public-sector-bank stocks because of the leverage these banks possess in the market through their large franchises.

They can derive huge cost advantages over private sector banks, can pull in low-cost funds, and expand their businesses in coming years. Credit growth is also bound to take off in the next one or two years as companies start to expand their businesses and take up more capital expenditure. Lower interest rates would further prop up other income. Therefore, a further re-rating in these stocks cannot be ruled out, and should take the average valuations to levels of around 15 times earnings over the next three years.

Hence, these stocks are more likely to see both an earnings pick-up and a valuation expansion in coming months. That means more returns are on the cards.

Savvy investors are playing the sector through public-sector-bank ETFs, which provide comprehensive exposure to the segment. Says Virendra Verma, a communications professional and an investor in public-sector-bank ETFs: "It's not very easy to pick and choose among the different banks in the PSU space. Since the entire sector is expected to do well over the next three years, I thought it better to start investing in public-sector-bank ETFs whenever there was a dip in this public-sector-bank index. It gives me a holistic exposure to the sector, and saves me the hassle of selecting individual scrips."

The public-sector-bank ETF is an exchange-traded fund that can be bought in the stock markets, with the units then credited to your demat account. The public-sector-bank ETF is benchmarked to the Nifty PSU Bank Index, which comprises 12 public-sector-bank stocks. Among the banks with top weighting in this index is the SBI.

At present, there are two funds, the Goldman Sachs PSU Bank Bees, and the Kotak PSU Bank ETF. Both these have a lower expense ratio of 0.49 percent, and track the Nifty PSU Bank Index performance very closely.

Investors can either SIP into these exchange-traded funds or buy the ETFs whenever there is a correction in the index.