Motilal Oswal Institutional Equities in its latest report has highlighted the fact that there is light and the end of the tunnel for public sector banks. Here are reasons why the broking firm is bullish on select public sector banks.
Asset quality outlook improving
According to the brokerage firm, the asset quality outlook for public sector banks is improving gradually after a prolonged corporate NPL cycle - gross non performing asset ratios had reached the peak of 15% in FY18. a) Government initiatives to boost manufacturing; b) rising commodity prices; c) deleveraging by large corporates; and d) balance sheet cleanup, along with the increasing pace of stressed asset resolution, have resulted in GNPA ratios moderating to 9.5% as of FY21.
"Most public sector banks carry healthy PCR in the 63-70% range (barring BoI with 79%). This places them broadly in line with private peers. Thus, we estimate credit costs to moderate, but believe normalization to be an FY23 event," the brokerage has said.
Strong rebound in earnings
Motilal Oswal in its latest report has also said that these banks are well-placed to deliver a strong rebound in earnings as we estimate FY22E PAT to be 11 times of the sum of FY17-21 PAT, while FY22-24E earnings would grow at a healthy 25% CAGR.
"We estimate RoA/RoE to improve to 0.8%/13.2% for FY24E v/s 0.4%/6.1% for FY21. For the past few years, PSBs have focused on strengthening their balance sheets by improving the coverage ratios, which improved significantly to 68% in FY21 v/s 47% in FY18. During FY15-21, the Top seven public sector banks took a significant stock of provisions towards stressed accounts, with the total provisions coming in at Rs 7.2t. Thus, provisions as a percentage of PPoP stood elevated at 63-144% in FY20," the brokerage has said.
But the stocks of Bank of Baroda, Union Bank, Canara Bank, SBI and Indian Bank
Motilal Oswal has a buy call on the stocks of public sector banking names like State Bank of India, Union Bank of India, Indian Bank, Canara Bank and Bank of Baroda. The highest stock price gains that are being seen are in the stocks of Union Bank of India, State Bank of India and Bank of Baroda.
|Name||Current market price||Target price|
|Union Bank of India||Rs 46.45||Rs 65|
|Canara Bank||Rs 218||Rs 270|
|Indian Bank||Rs 158.40||Rs 250|
|SBI||Rs 499||Rs 675|
|Bank of Baroda||Rs 94.35||Rs 130|
As far as we at goodreturns are concerned, while there maybe value in PSB stocks to buy them, the indices have run-up too sharply, thanks to huge inflows into mutual funds. We believe that it makes sense to avoid pumping large sums of money into stocks at the moment. Be a little cautious only because of where the markets are at the moment.
The stocks have been picked from the brokerage report of Motilal Oswal Financial Services. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.