Buy Two Large Cap & Mid Cap PSU Banking Stocks, Brokerage Sees Gains Up To 17% 12 Months

On Monday, the Nifty Bank index closed on a positive notr at 41686.7, 1.04% up. Major banks were among the top gainers such as Bank of Baroda and State Bank of India. Leading brokerage firm Emkay Global recently published reports on two Public Sector Banks namely State Bank Of India (SBI) and Bank of Baroda (BoB) with a positive note, suggesting buy. Here are the key highlights of the report.

State Bank of India (SBI)

State Bank of India (SBI) with a market cap of Rs 5,48,105 crore is the largest commercial bank in India. The bank reported its highest quarterly net profit ever at Rs 13,265 crores in Q2 FY23, while it's year-over-year (YoY) net profit increased by roughly 74%. (73.93 per cent YoY to be the exact number). According to Emkay Global, Bank reported Best-in-class 2Q results with a focus on sustaining performance ahead.

The brokerage in its report has given a buy tag to the sock with a target price of Rs 715 per share for 12 months target period. According to the given target price, the stock is likely to gain 17% from its current level in the given target period of 12 months.

On Monday, the stock last traded at Rs 614.15 per share on NSE, 3.34% above its previous close. It recorded its 52 week high on November 7, 2022, at Rs 622.70 per share and 52 week low on March 8, 2022, at Rs 425, respectively. 

The stock has given good returns over the past 5 years. In a week, the stock gave 7.03% positive returns. In the past 1 and 3 months, the stock gave 15.83% and 15.65%, respectively. In the past 1 year, the stock has given 15.65% positive returns. The stock on long-term investments of 3 and 5 years performed better than short-term. In the past 3 and 5 years, it has given 93.04% and 93.62%, respectively. 

SBI - Brokerage's comments and views

According to Emkay Global, Post the treasury hit leading to a profit miss, SBI made a strong come back in 2Q, reporting its highest-ever quarterly PAT at Rs132bn (Emkay est.: Rs95bn) on the back of robust credit growth, sharp margin uptick and lower LLP. Bank guides for sustained healthy growth/margin and reduction in NPAs, which should drive its RoA to ~1% in the mid-term. 

Bank clocked higher-than-industry credit growth at 20% YoY/5% QoQ, led by strong traction in retail/corporate growth. Bank believes that the impact of rate hikes on credit demand is not prominent enough yet and, thus, expects growth to remain healthy in the near-to-medium term. This, coupled with continued asset re-pricing, should help the bank sustain margins at around current levels, with an upward bias.

Bank has seen steady improvement in asset quality, with NNPA now below 1%, given its aggressive provisioning stance; the restructured pool too moderated, to 0.9% of loans. Bank claims that it has not been intimated by the RBI on any standard provision shortfall towards stressed PSU entities, while it remains well covered and hence expects any impact to be manageable.  

Factoring-in better growth/margins and lower LLP, partly offset by higher staff cost due to ad hoc provisions towards wage revision, we raise our earnings for FY23-25E by 10-14% and expect the bank to report decadal-high RoE of 15-18% without equity dilution. "We retain BUY on the stock, with revised TP of Rs715 (earlier Rs640), based on 1.4x (earlier 1.3x) Sep-24E standalone ABV and subsidiary valuation of Rs206," the brokerage has said. 

Bank of Baroda (BoB)

Bank Of Baroda (BoB) with a market cap of Rs 81,888.52 crore, is a Mid Cap bank. It is the third-largest commercial bank in India. The bank reported strong credit growth (21% YoY) coupled with a margin uptick (31bps QoQ) and improvement in headline NPA ratios (94bps QoQ). According to the brokerage, the bank's bank's strong credit growth, asset re-pricing and one-off interest recovery leads to a sharp margin uptick.

In its report, the brokerage has assigned the stock a buy rating and set a 12-month target price of Rs 175 per share. The stock is expected to increase by 11% from its current level over the given target period of 12 months, according to the given target price.

On Monday, the stock last traded at Rs 158.35 per share on NSE, jumped 9.55% as compared to its previous close. It recorded its 52 week high level on November 7, 2022, at Rs 161.60 per share and 52 week low on December 27, 2021, at Rs 77.05, respectively. 

The stock has given good returns over the years as shares gained 64.61% in 3 years, however, in the past 5 years, the stock has fallen, giving 4.18% negative return on investments. In a week, the stock grew 7.21%. In the past 1 and 3 months, the stock grew 17.04% and 34.31%, respectively. In the past 1 year, the stock grew by 54.34%

BoB - Brokerage's comments & views

Bank of Baroda (BoB) reported a strong beat on PAT at Rs33.1bn (vs our est of Rs23.7bn), mainly led by robust growth, sharp 31bps QoQ jump in margins (including one-off interest recovery on upgradation of lumpy account and swap unwinding) to 3.3% and lower LLP, as NPA ratio declined 94bps QoQ due to higher recoveries/w-offs. 

Strong credit growth at 21% YoY/5% QoQ was supported by continued strong traction in the retail and overseas book. Bank expects domestic corporate growth to accelerate too, more so in the seasonally-strong Q4. This, coupled with continued asset re-pricing, should keep margins healthy. 

Bank guides for ~0.9% RoA in FY23 and ~1% in FY24 on the back of better growth/moderation in LLP, partly offset by increase in staff cost (Rs2.5bn per quarter) due to the impending new wage negotiations. The MD's current term is likely to expire in Jan23, but could be extended by 6 months by the government. 

"We have revised our earnings for FY23-25E by 18%-22% and the rollover TP to 0.8x Sep24E ABV, leading to revision in TP to Rs175/share (up from Rs140). We retain our BUY rating on the stock," the brokerage has said. 

Disclaimer

The stocks have been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.