PSU bank shares are showing some signs of life, as many analysts believe that the worst for the sector maybe behind.

Shares of several PSU and private sector corporate lenders have gathered steam. ICICI Bank shares have jumped to almost Rs 340, from just Rs 280, a few months ago. State Bank of India too has seen a stupendous rally, as investors shift their attention to large corporate lenders.

In fact, banks like Union Bank, reported a net profit for the quarter ending June 30, 2018, while another large lender, Punjab National Bank has reported encouraging numbers. So, is it a good time bet on PSU Banks?

Buy selectively

PSU banks are momentum stocks and can rally if things improve. Interestingly, NPAs cannot worsen too much from here, which means the worst could now be behind.

Stocks like Punjab National Bank (PNB)and Bank of Baroda, maybe interesting picks, particularly Punjab National Bank.

Here's why PNB is a good bet?

India's second largest government bank in terms of assets reported a net loss of Rs 940 crores for the quarter ending June 30, 2018.

However, there are a few things to note about these numbers. The bank has already made huge provisions in the Nirav Modi fraud case. Of the total Rs 14,357 crores PNB owes banks for the guarantees, it had set aside Rs 7,178 crores in the March quarter. For the quarter ending June 30, 2018, it has set aside Rs 1,863 on account of the fraud.

It will now spread the remaining over the next two quarters, after which it would have made complete provisions. Another two quarters of pain is likely, for the bank.

However, the bank can always shore up its capital through stake sale in PNB Housing Finance and PNB Metlife. The housing finance stake sale is likely to fetch the bank almost Rs 8,000 crores. Apart from this the bank is also looking at selling its erstwhile head office for Rs 700 crores odd and a stake sale in PNB Metlife would fetch additional amounts.

What is most heartening is the fact that PNB recovered almost Rs 8,445 crore in the June quarter against Rs 5,617 crore in all of 2017-18. The bank has set itself a target to recover as much as Rs 20,000 crores of bad loans in the first half of 2018-19.

Clearly, this is one PSU Banking stock that could see the worst behind, if patient investors are willing to wait for a couple of years. This is also because credit offtake is likely to be much better in the coming years, as economic growth gathers momentum.

With bad loans recovery likely, bulk of provisions for the Nirav Modi fraud case complete, we should see NPAs improving and the bank back on track, due to asset stake sale.