An index of state-owned banks rallied an unprecedented 30 per cent — the biggest single-day spurt ever — and the benchmark indices climbed to record highs on Wednesday, reacting to the Cabinet nod a day earlier to Rs 2.11-lakh-crore bank recapitalisation plan and Rs 6.92-lakh-crore highway construction project.
The government announcements to spur the economy is being seen by many as a much-needed stimulus package, which could shore up the sluggish credit growth at public sector undertaking (PSU) banks and help kick-start the economy.
The benchmark Nifty gained 0.9 per cent to close at 10,295, while the Sensex added 1.3 per cent to close at a record 33,042. The Nifty PSU Bank index soared 29.6 per cent, with all state-owned banks (22) cumulatively adding Rs 1.18 lakh crore in market value, taking their total m-cap to Rs 5.48 lakh crore.
The finance ministry, after market close on Tuesday, said it would inject Rs 2.11-lakh-crore in PSU banks over two years. Analysts said the top-up plan was long-awaited for PSU banks that have been reeling under a pile of non-performing loans (NPLs), which was blocking their growth plans.
State Bank of India (SBI), India’s largest lender, gained 27.6 per cent and added Rs 60,597 crore in market value. Punjab National Bank and Bank of Baroda gained 46.2 per cent and 31.5 per cent, respectively — each adding over Rs 10,000 crore in market value.
In contrast, private banks such as HDFC Bank, Kotak Mahindra Bank and YES Bank each fell nearly 5 per cent on concerns that recapitalisation plan would help public-sector lenders regain lost market share. Sixteen private banks saw their combined market cap fall by Rs 9,815 crore to Rs 12.39 lakh crore. ICICI Bank and Axis Bank, however, bucked the trend. ICICI Bank was up 14.7 per cent to Rs 305.60, while Axis Bank gained 4.6 per cent to Rs 472.70.
Non-banking finance companies such as Bajaj Finance, Indiabulls Housing and Edelweiss, which were gaining market share at the expense of capital-starved PSU banks, also fell between five per cent and eight per cent.
“PSU banks’ recapitalisation is a fiscal stimulus with a strong multiplier. With about 10 times loans-to-equity multiples, even if one assumes that Rs 90,000 crore of the Rs 2.1 lakh crore is growth capital (rest used for provisions), it enables banks to infuse Rs 9 lakh crore into the economy,” said Neelkanth Mishra, equity strategist at Credit Suisse, in a note. The brokerage made significant changes to its model portfolio of stocks adding PSU banks and moving private banks from “overweight” to “neutral”.
“Our view on the NPL cycle has been that the only way to break it was aggressive recapitalisation. The recapitalisation plan will break the five-year-plus cycle of NPLs,” said a note by another foreign brokerage Morgan Stanley, which “double upgraded” SBI, ICICI Bank and PNB.
The government on Tuesday had also announced the Bharatmala scheme to construct 83,677 km of roads at an investment of Rs 6.92 lakh crore by 2022. The move fueled a rally in infrastructure and cement companies, with Larsen and Tourbo and UltraTech gaining six per cent each.
The government stimulus plan also helped reverse the selling by overseas investors. Foreign portfolio investors, who have been consistently pulling out money from domestic stocks, bought shares worth over $500 million (Rs 3,582 crore) on Wednesday. The buying momentum was so strong that the cash turnover on the National Stock Exchange was highest-ever at Rs 55,909 crore, compared to the previous best of Rs 45,012 crore in September last year.