1 PSB Stock To Buy For 2 Quarters As Suggested By HDFC Securities

Indian indices in the previous session snapped four day losing streak and on Wall Street gains during the overnight session will open on a positive note. Amid the given landscape in the Indian equities space, HDFC Securities has recommnded a buy on 2 medium term picks

1. Indian Bank:

The buy has been given on this PSU Bank for a target price of Rs. 214 i.e. an upside of 14 percent from the current levels.

HDFC Securities' take on Indian Bank:

There has been instilled confidence after the successful transaction of Air India that government will progress well on its divestment agenda. Also, for the PSBs that are considered to be weak IDBI Bank as well as Bank of Maharashtra there is seen cleaning of books and transfer of bad assets to the NARC as visible in the Q2 results.

The move augurs well for the PSBs which until some time faced huge NPA crisis. "Both of these developments augur well for the prospects of PSU banking stocks as they provide higher margin of safety in terms of valuation in an otherwise over-heated market", said the brokerage report.

"We have been observing a sharp re-rating in the PSU banking space lately. Nifty PSU Bank Index has been making higher highs since last four weeks and is up by 12.8% during that time. Privatization theme is keeping them in the lime light and now the hope of earnings as wellas asset quality recovery would further sustain the rally. Some of the good quality names within the PSBs with loan book or CASA ratio as good as some top tier private banks, are available at almost half the book value of FY23E; as against about 2x to 3x Price-to-Book Value for private players", added the report.

Re-rating prospects to increase with acquisition by big corporates

Lending quality has been worked on and there is no crisis amid the covid crisis. So, there are expectations that the valuation gap between private and public lenders will reduce faster. "We believe that the PSU banks might see goodaddition to the book value per share in the next year mainly on account relatively lower credit costs and recoveries. We further believecquisition of some PSU Banks by the any prestigious corporates/Institutions - local or foreign - at a good valuation may further re-rate the sector.

ICRA expects credit growth for banks

Amid increased vaccination pace and pick up in recovery there is expected pick up in credit offtake too. ICRA expects credit growth of 7.3-8.3% for banks

for FY22 compared to 5.5% for FY21. It believes that with the improved capital and profitability position of public banks, which accounts for a 62% share in bank loans, and abundant liquidity in the banking system, supply of credit does not appear to be a constraint.

Rationale for a buy

 

1. Better managed PSB
2. low valuations
3. Required limited support from the centre in raising funds.
4. Not a single rupee loss in the last decade despite the credit blow that hit the overall banking industry.
5. Good dividend track record

Disclaimer:

The stock mentioned herein is taken from the report of HDFC Securities and investors need not construe the details given here as a suggestion to buy rather they should do their own study and analysis.

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