State Bank of India surged on Wednesday on good buying support.

The stock of India's largest state-run commercial bank was up by 2.2%  at Rs 328.50 on the BSE in early-afternoon trades. Earlier in the session, the stock rose by as much as 2.5% to Rs 329.55, which is a 52-week high. A good volume of 10 lakh shares was recorded on the counter.

With the latest rally, the State Bank of India (SBI) stock has moved past the band of Rs 280-300 in which it hovered in the last few months. From a recent low of Rs 269.90 on 31 March 2003, the stock has gained 21.7% in less than two months to the current Rs 328.50. The surge on the counter has come amid  volatile intra-day movements.

Banking analysts said the current rally on the SBI counter  is in line with the surge in the stocks of other state-run banks like Punjab National Bank (PNB), Oriental Bank of Commerce (OBC), Canara Bank, Bank of Baroda, Andhra Bank, Union Bank of India (UBI) and Corporation Bank. The triggers for the rally in PSU 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). Banks' focus on the retail segment has also helped in boosting their financial performance. There is a very low  rate of default in repayment of loans in the retail 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. However, 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.

Banking analysts said that  the SBI stock is available at a cheap valuation. Mover, the bank's net NPAs would reduce further in the coming months. SBI is targeting a sharp reduction in its net NPAs over the years to 2% by March 2005 from the current 4.67%. The bank has approached consulting firms and specialists in a bid to recover its sticky loans.

For Q3 ended 31 December 2002, SBI recorded a 28% growth in net profit to Rs 787.05 crore. Net revenues jumped by 18% to Rs 3,756.93 crore.

However, the key trigger for SBI is relaxation of  the ceiling for foreign institutional investors (FIIs). Currently, this limit in SBI is at 20%, which has already been touched. FIIs hold about 20% stake in SBI. The market was agog with rumours a few months back that the Centre may remove the holding of Global Depository Receipt (GDR) holders from the overall ceiling for FIIs in SBI. The GDR holders have about 8% stake in SBI. In case the GDR holders' stake is excluded from the overall  ceiling for FIIs, it would provide that much room (about 8%) for FIIs to buy further shares of the bank.