The stupendous rally in PSU banks may be far from over, even as stocks in this pack have been multi-baggers over the past two years, according to ace investor Madhusudan Kela, Carnelian Assets' Vikas Khemani and N Jayakumar of Prime Securities.

The three investors were commenting on the performance of banking stocks over the past year during the Diwali Party show at Moneycontrol on November 12.  According to Khemani, the main trigger for this pack stems from three things: transformation across asset quality, better governance and technology.

PSU banks were among the major gainers, and rose over 2.6 percent during trading hours during Muhurat trading on November 12. The Nifty PSU Bank index has gained over 38 percent over the past year, and 77 percent in the last five years. As of November 13, the index was at 5,178.

At one point, the asset quality and governance of PSU banks were worse than private lenders, and they had poor technology – losing out to most private sector banks. But this has changed over the last 4-5 years. According to Khemani, the PSU banking sector now boasts of good asset quality and is functioning with minimal interference from the government.

In Q2FY24, a majority of PSU banks have seen an increase in profits and decline in NPA numbers. For example, the Gross Non-Performing Asset (GNPA) ratio of Canara Bank fell to 4.76 percent from 6.37 percent year on year (YoY).

Even the net non-performing asset (NNPA) ratio fell to 1.41 percent, down from 2.19 percent in the same

Ace investor Madhusudan Kela cited the example of Canara Bank to show why he believes in investing in PSU banks. The PSU lender has made a profit of Rs 7,000 crore in the first half of 2023-24, and its guidance is to repeat the same performance in the second half.

“That is around Rs 15,000 crore profit and a market cap of Rs 75,000-80,000 crore,” he said.