Stocks To Buy: 6 Banking Stocks That Trade Way Below Long-Term Averages

It's probably time to re-visit your portfolio and look at stocks that could remain resilient in the light of rising interest rates. In India, economic growth is unlikely to collapse, but, higher interest rates and higher inflation could lead to tepid growth rates going forward. It may just be time to add some good quality banking names to your portfolio.

Banking Stocks that are trading at discount to long-term averages

Name	Current p/e	1-year average	Premium/discount
Bank of Baroda	5.1	11.4	-55%
Canara Bank	4.3	5.9	-27%
Indian Bank	4.1	10	-59%
PNB	6.4	10.5	-39%
State Bank of India	8.4	13.2	-36%
Union Bank	4	7	-43%

The above is taken from the report of Motilal Oswal.

Buy State Bank of India, Canara Bank, Bank of Baroda and Indian Bank

If you ask analysts to identify which PSU banking stocks to buy for long-term, the first would be State Bank of India and in the next it would probably be Bank of Baroda or Canara Bank. In fact, most brokerages post SBI results have a significantly higher price target on the stock of State Bank of India. According to Axis Securities, the bank remains the best play on the gradual recovery of the Indian economy on account of its healthy PCR, robust capitalization, a strong liability franchise, and an improved asset quality outlook. The securities firm states that normalization in credit costs and improved growth outlook should lead to double-digit ROEs of 14-15% over FY23-24E. Axis Securities has put a buy rating on the stock with a revised target price of Rs 665 per share (SOTP basis core book at 1.3x FY24E and subsidiaries at Rs 185).

Rising bond yield may impact earnings of banks

According to the Motilal Oswal report, earnings outlook for public sector banks has improved led by reduction in credit cost as PCR has been strengthened over the last few years. "SMA pool continues to moderate that augurs well for incremental slippages to remain controlled and keep the credit cost limited. We believe more rate hikes are round the corner that could potentially impact PSU banks' treasury performance adversely and drive higher MTM losses over 1QFY23, though improvement in operating earnings would enable some absorption of these losses," the Bulls and Bears report has stated.

Markets are beginning to get volatile

Apart from this, the one problem for the markets right now is that there could be immense volatility going forward. According to analysts, the p/e multiple for Nifty companies are now in line with long-term averages. However, rising interest rates are posing a risk for the markets and a sharp hike in interest rates could lead to economic slow down. This is likely to impact banking stocks as well. Another factor worth noting is that PSU banking can be high beta stocks, which can move significantly lower when the markets fall and significantly higher when the markets gain. Overall, we believe that the stocks of Bank of Baroda, State Bank of India and Canara Bank are good psu banking stocks to buy, while one can also look at Indian Bank shares. We do not recommend buying PNB, which has significantly underperformed peers.