Buy SBI Share Over Other PSU Banks? Brokerage Likes Stronger Franchise In State-Onwed Banking Stocks

Tier-2 PSU Banks have performed well in the past year or so, however, brokerage Kotak Institutional Equities said, valuation multiples have now converged sharply, prompting a review of their recommendations. The brokerage has preferred the largest PSU lender State Bank of India (SBI) over other PSU banks due to its stronger franchise. Meanwhile, Kotak suggested ADD on Bank of Baroda, while downgrading the outlook on other state-owned lenders like Canara Bank, Union Bank of India, and Punjab National Bank (PNB).

In the past few years, PSU banks' asset quality has recorded steady recovery towards the end of the corporate NPA cycle and even held up well through the Covid pandemic - contrary to the expectations of many.

The recovery cycle in asset quality was due to the downward trend in slippages, which was followed by declining gross non-performing assets (GNPA) ratios.

"We have now seen credit costs also decline as net NPA ratios for most PSU banks have converged to a level of about 1.0%. The steady decline in credit cost has driven a steady improvement in RoE closer to mid-teen levels," Kotak's note said.

Further, the brokerage added, "With increasing comfort in the outlook for asset quality and return ratios, these Tier-2 PSU bank stocks saw a sharp rally recently and their valuation multiples have now converged closer to those of SBI, which traded at a valuation premium for a few years. As a consequence, the investment thesis of favoring these inexpensive stocks has played out very well."

Also, Kotak reviewed its investment thesis on the PSU banking space with the recent swift convergence in valuation multiples.

Its report added, "While we earlier favored holding these Tier-2 PSU bank stocks, given the anticipated asset-quality recovery, making an investment case for them is challenging unless we believe that Tier2 banks would be able to deliver superior return ratios for a much longer period, led by a healthy differential in loan growth, superior revenue mix leading to better operating profit ratios and importantly lower credit costs."

Therefore, Kotak does not think it has any evidence to change this thesis.

Hence, it said, "We now recommend SBI (retain BUY) as our preferred stock within the PSU bank space, while retaining ADD on BOB and downgrading the others - PNB (REDUCE), Union Bank (ADD) and Canara Bank (ADD). We roll over our Fair Values to base them on March 2026 BVPS while maintaining the same pecking order - SBI (~1.2X), BOB (~1.0X) and the rest (Canara, Union and PNB) at ~0.9X."

In Kotak's view, SBI has demonstrated that its franchise has been better than other PSU banks' peers in terms of through-the-cycle credit cost, liability franchise, asset franchise as well as digital/technological enhancements. Hence, the brokerage prefer to now go back to recommending SBI over the other PSU banks.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.