Shares of public sector banks surged further today amid heavy volumes.

The  gainers were Bank of Baroda (up 8% to Rs 123.50), Andhra Bank (up 3.6% to Rs 34.25), Bank of India (BoI) (up 3.1% to Rs 44.60), Canara Bank (up 2.9% to Rs 108.70), Punjab National Bank (PNB) (up 1% to Rs 148.50), State Bank of India (SBI) (up 2% to Rs 327.90), Dena Bank (up 2.1% to Rs 16.35), Indian Overseas Bank (IOB) (up 1.9% to Rs 24) and Union Bank of India (UBI) (up 1.2% to Rs 31.50) on the BSE.

Among these, those stocks that surged on the back of high volumes were Bank of Baroda (30.4 lakh shares), Canara Bank (25.4 lakh shares), PNB (13.6 lakh shares), SBI (13.5 lakh), Andhra Bank (11.4 lakh shares) and Union Bank of India (10.7 lakh shares).

Stocks of state-run banks have witnessed a spirited rally in the last few months. For instance, PNB has leaped  in the last few months. From a low of Rs 41-45 levels in October-November 2002, the stock has risen to the current Rs 150-level. Similarly, from a Rs 50-60 in July-November 2002, the BoB stock has surged to the current Rs 125-level. Oriental Bank of Commerce (OBC) has risen to the current Rs 130-level, compared to the Rs 40-45 level in late calendar 2002. A host of other PSU bank stocks like Andhra Bank, UBI, BoI, Syndicate Bank, and IOB have all spurted over the last few months. Apart from a rise in their prices, state-run bank stocks are also traded heavily. Most of them are now trading at their 52-week high or all-time high levels.

The latest surge in these stocks is due to expectations that the banks' plan to return capital to the Government of India (GoI), which would  result in lower equity base, thereby boosting their earnings per share. Andhra Bank has already returned Rs 50 crore of its capital to the GoI and it proposes to return additional Rs 50 crore. Similarly, OBC proposes to return Rs 50 crore to the GoI. Meanwhile,  PNB and Canara Bank may also follow suit.

Analysts remain bullish on PSU bank stocks following their attractive valuation. "Their valuations are attractive, if one looks at the projected numbers for FY 2004," said a banking analyst with a local brokerage.

The triggers for the rally in state-run bank stocks have been the current low interest regime, and improvement in the asset quality of banks (with most of them having written off non-performing assets against treasury income). The soft interest rate environment has helped the banks to grow their retail loan portfolios. Their focus on the retail segment has also helped in boosting the financial performance (as there is a very low rate of default in repayment of loans in the segment).

Public sector bank stocks have also risen on the back of the Securitisation Act, which aims to speed up recovery of sticky assets of banks without additional court procedures. However, a court case is pending as to whether banks would be able to dispose off assets of the defaulting borrowers. Pending this clarification, not much recovery is taking place on the corporate front, banking analysts said. Nevertheless, the Securitisation Act augurs well for the lending business as it would reduce incremental non-performing assets (NPAs) i.e. willful defaults by borrowers may come down drastically.