What is driving the stock price rally in Canara Bank?

It is not often that public sector banks caught the fancy of Rakesh Jhunjhunwala. The many may be no more but his legend lives on. One such public sector bank that Rakesh had picked up quite aggressively more than a year back in 2021, was Canara Bank. Of course, the stock of Canara Bank has more than doubled since he took the stake, but the 2 year progress in price is a lot more interesting. Over the last 2 years i.e. between October 2020 and October 2022, the stock of Canara Bank is up nearly 4-fold from around Rs84 to nearing Rs300 per share. The table below captures the monthly prices of Canara Bank since October 2020.

Through the entire rally, the delivery percentage has not gone up too significantly, indicating that there is still a lot of speculative activity in the counter. However, the stock spike has not been just about speculation. A number of frontline brokers have come and upgraded the price of the stock even after a very sharp rally. There are obviously a number of fundamental that investors and brokers are betting on the stock of Canara Bank as a medium to long term bet from a fundamental perspective.

What is driving the rally in Canara Bank?

Over the last few months, PSU Bank index has been among the best performers among the various sectoral indices. Obviously, things are changing with the PSU banking space. Here are some key takeaways that are making this space interest and specifically making Canara Bank a preferred bet among the PSU banking stocks.

    a) There is a high level of interest that is building up in the mid-sized banks. As the COVID stress eased, it was banks like Canara Bank that managed to really ease the stress of bad assets and hence sharply reduced provisioning. This has directly boosted profits. 

    b) While most of the institutional investors are now looking at the PSU Banking space as a cheaper access point into banking. Mid-sized banks are likely to gain a lot more and Canara Bank with its recent mergers, is in a better position.

    c) While the net interest margin (NIM) spreads of Canara Bank are still much lower than the private sector counterparts, it has been showing an uptrend, although it is still below the 3 mark.
The rally is also reflective of the fact that the stock may have corrected too much due to the negative sentiments surrounding the PSU banking stocks.