PSU banks' QIP rush is a healthy growth indicator, find analysts

Analysts tracking banks are encouraged by the sight of a large number of PSU lenders lining up to potentially raise over Rs 30,000 crore via qualified institutional placements or QIPs, viewing it a sign of potential growth.

Statistics from Prime Database shows that several public sector banks - including UCO Bank, Central Bank of India, Punjab National Bank, Indian Overseas Bank, Union Bank of India, and Bank of Maharashtra - have outlined their plans to raise capital via the QIP route.

Banks Rushing for QIP

The cumulative size of these upcoming QIPs is being projected to possibly be in excess of Rs 30,000 crore. So far in 2025 (till August), a total of Rs 64,924.05 crore has already been raised by companies across various sectors, as per data from Prime Database.

A QIP is a capital-raising mechanism that allows listed companies to secure funds from qualified institutional buyers (QIBs) by issuing fresh equity shares, convertible debentures, or other securities. QIBs can include mutual funds, pension funds, and banks, among other institutional entities.

In January this year, PSU lender Union Bank had raised around Rs 3,000 crore through a QIP. Jignesh Shial, Director - Research & Head of BFSI Sector at InCred Capital attributes this trend to the government's preference for these banks to secure funds from the open market, based on their performance and capabilities.

"Basically, PSUs need money to grow, and the way this government has been functioning, it seems they prefer PSUs to raise money from the open market based on their performance and capabilities," he said.

Read More: Bank of Maha may raise Rs 5,000 cr, Central Bank Rs 2,000 cr via QIP issues

Deepak Jasani, Head of Retail Research at HDFC Securities said that around 3-4 years ago, PSU banks were not performing well, and the government had infused a lot of equity. Now, there is a need to reduce the shareholding and that can be done in two ways. "Either the government comes out with an OFS or QIP. When a bank comes out with a QIP, it benefits because it enhances their capital and net worth... Depending on how the QIPs are received in the market, and whether the government needs funds, they might shift between different funding methods," he said.

InCred's Jignesh Shial maintains that the street will view this positively if the funds raised are used for growth purposes, given that concerns around most non-performing assets (NPAs) are large behind us now.

Experts say there more lenders may look to raise funds as many of the PSU banks also need to reduce shareholdings in order to comply with the minimum public shareholding regulation that stipulates promoter holding cannot be more than 75 percent.

Nitin Aggarwal, Head of Banking & Financials Research – Motilal Oswal Institutional Equities adds that apart from banks, wherein promoter shareholding is high, one could also see QIPs from large PSU banks, only to raise capital.

"We can expect certain banks, including SBI, to have the need to raise capital as well," he added.

InCred's Shial anticipates continued market interest in PSU bank QIPs, particularly from insurance companies and mutual funds. "There will be takers, selective takers, for sure. Insurance companies, in particular, might be more interested, as they tend to invest for the long term and can play the full cycle," he said.

Opportunities and Challenges Ahead

Most experts remain positive on the banking sector, with the Nifty PSU Index having gained approximately 34 percent in last one year.

In terms of valuations, Shial suggests that PSU banks have seen an increase in valuations and are now trading close to one-time book value, compared to the earlier lower valuations. Despite this, he said that valuations are still reasonable, and consolidation might continue for a while.

Nitin Aggarwal of Motilal Oswal Institutional concurs, adding that PSU banks have achieved a healthy return on equity (RoE) of around 11-12 percent, with valuations in the range of 0.8 to 1 time book value.

In terms of potential risks, Shial sees concerns over consistent market share loss to private lenders, adding that this structural shift is more worrying than cyclical NPAs.

Most analysts note that going ahead, the preference on type of PSU banks will depend on the investor's risk appetite.

"Certain PSUs offer better growth based on size and geography. Investment choices should match risk appetite – high-risk investors might opt for small and mid-sized PSUs, while moderate-risk investors could focus on larger ones. Stock price movements will also vary for these," Jasani said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.