Early warning indicators, gauging the health of PSU banks, are giving stock market analysts no reason to worry about, but a swift re-rating of valuation multiples does.
A few brokerages said valuations are steadily turning less attractive for PSU banks but they are not outrightly concerned. They have State Bank India (SBI) as their top pick among PSBs.
The current benign credit environment has supported asset quality for PSU banks and Kotak Institutional Equities said PSB profitability has been further boosted by provision reversals and revenue recovery from bad loan resolutions.
“While these recoveries will likely hold up in FY2025E as well, a steady decline is inevitable thereby impacting profitability. Given the swift re-rating of valuation multiples, we downgrade Canara (REDUCE) and PNB (SELL), while retaining ADD rating on BOB and Union Bank,” it said.
Among PSU banks, Kotak likes SBI as its premium over Bank of Baroda (BOB) and with other mid-tier public banks has declined sharply and is closer to the best of times.
“On the other hand, SBI’s discount with HDFC Bank has narrowed sharply as well. We are building in a call that the extent of the differential in return ratios, loan growth, NIM and credit costs is not likely to be too different in the medium term, until we have clear evidence of weak underwriting from these players,” Kotak Institutional Equities said.
For SBI, Kotak maintained its ‘BUY’, with a fair value revised target of Rs 850 against Rs760 earlier.
Motilal Oswal Secuities said that considering PSBs’ valuation history, their trading multiples may look constrained now. But it insisted that the quality of earnings, growth outlook, and broader re-rating in public sector enterprises will enable steady performance for the sector.
“We believe that while the PSU rally has been sharp and the sector has seen significant re-rating, the stock valuations still look reasonable in context to business growth and profitability,” it said.
To give weight to its point, Motilal Oswal noted that PSBs have seen a remarkable turnaround, from record losses to record profits, as their aggregate earnings crossed the Rs 1,00,000 crore mark in FY24. The brokerage said PSBs are well positioned to sustain 1 per cent RoA, which was previously seen as an aspirational target.
“Some PSU segments are doing very well like PSU banks where the turnaround is sharp. PSU banks which reported losses of Rs 87,000 crore in FY18 will be making estimated profits of around Rs 1.3 lakh crores in FY24. Even after the run up in prices, PSU banks are fairly valued,” . V K, Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Emkay Global has added SBI and trimmed weights on HDFC Bank and IndusInd Bank to its model portfolio, saying SBI has the strongest deposit franchise in a tight liquidity scenario.
In a note, it said loan CAGR for PSU banks over the last three years has been about 13.5 per cent. SBI will earn about 18 per cent ROE in FY24, it said.
“The average forecast for FY25/26E is 17.9 per cent. Ex SBI, other large PSUs’ average ROE for FY24 is 14.9 per cent, while the average forecast for FY25/26 is 15.5 per cent/15.7 per cent, respectively,” it said.
Emkay said PSUs will not be compelled to dilute below the book unlike in the past. They may not need to dilute at all, as growth rates are well below reported ROEs, it said.
“We expect PSU bank to take the lead in infrastructure financing and corporate project loans – and if our hypothesis is right, the loan and earnings growth will decisively outpace that of private sector peers. Undoubtedly, the quality & capital market awareness of top management, the RBI’s micro audits, quality of underwriting, etc have evolved significantly over the last decade. If true, the asset cycle reversal will mostly be influenced by economic cycles and will have a similar impact for most banks adjusted for the product mix,” it said.
