Banking stocks rise after Goldman Sachs upgrades PSU banks
SBI and Bank of Baroda have been upgraded to 'buy' from 'neutral', Goldman Sachs said in an investor note
Mumbai: Banking stocks rose on Thursday after Goldman Sachs Group Inc. upgraded state-owned lenders, saying stressed assets will gradually decline as economic conditions improve. The potential for policy action after the April-May general election could improve the operating environment for banks, the brokerage said.
Shares of State Bank of India (SBI) gained as much as 4.88%, while those of Punjab National Bank (PNB) rose 4.73%.
Goldman Sachs said in a report public sector undertaking (PSU) banks may see bad loans fall by 3 percentage points in fiscal year 2016, after increasing to 17.5% of total loans in fiscal year 2015.
According to Goldman Sachs, key positive macroeconomic developments for financiers include a dip in the current account deficit to 0.9% in the third quarter of fiscal year 2014 from the peak of 6.5% in the year-ago period, and a fall in consumer price inflation to 8.1% in February 2014 from the peak of 10.5% in March 2013, which in turn could lead to rate cuts in 2015.
The Reserve Bank of India (RBI), which is scheduled to deliver its first monetary policy review of fiscal year 2014-15 on 1 April, is expected to keep rates steady due to a slide in both consumer price and wholesale price inflation.
Goldman also expects banks, specially state-owned banks, to benefit from reforms in the power and road space and a sell-down of assets by corporations to reduce stress.
“We believe that in our bull case scenario, asset recoveries will start to significantly exceed slippages from FY17, bringing down stressed loans for PSU banks from currently 10.5% to less than 5% by FY18," said the report.
SBI and Bank of Baroda (BoB) have been upgraded to “buy" from “neutral", Goldman Sachs said in an investor note on Thursday. The price target for SBI has been raised to ₹ 2,080 per share, while the price target for BoB has been raised to ₹ 840.
Punjab National Bank has also been upgraded to “neutral" from “sell", with a revised price target of ₹ 710.
“Our bull case analysis assuming significant reforms under a stable government suggests PSUs will likely provide significantly higher upside at 66% on average vs. private banks’ 48%; NPLs (non-performing loans) will likely fall sharply to 4.7% by FY18 from 9.3% in FY13 and ROA (return on assets) recover to 1% from 0.57% currently. However, an unstable government could mean a sharp increase in NPLs (perhaps touching the last cycle peak of 15%) and significant downside for PSUs at 50.5%, but slightly less for private banks at 28%," said Goldman Sachs analysts in the report.
Shares of SBI closed up 4.27% at ₹ 1,843 on Thursday on the National Stock Exchange. BoB gained 3.49% to ₹ 702.65 and PNB rose 3.75% to ₹ 705. The CNX PSU Bank index, a grouping of 12 state-owned banks, jumped 3.34% to 2,609.80 points, while the benchmark Nifty index gained 0.61% to 6,641.75 points.
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