PSU banks: Kotak Equities raises SBI share price target, downgrades Canara Bank and PNB
- On SBI's outperformance with other public banks, Kotak analysts said the premium at which SBI is currently trading to Bank of Baroda and with other mid-tier public banks has declined sharply and is closer to the best of times.
State Bank of India (SBI) is well-positioned to handle near-term concerns and has withstood most of them, with negligible impact on earnings, Kotak Institutional Equities said. The brokerage has maintained a ‘Buy’ rating on SBI shares and raised the target price to ₹850 from ₹760 earlier, implying an upside of more than 14% from its previous close.
Analysts at Kotak Institutional Equities do not see a specific tailwind that can cause a re-rating for SBI shares in the short term. However, they expect SBI to outperform other public sector banks, given the sharp convergence in multiples.
“We are valuing SBI at 1.4x book and 10x earnings for return on equity (RoE) at ~15%,” Kotak Institutional Equities said in a report.
On its outperformance with other public banks, Kotak analysts said the premium at which SBI is currently trading to Bank of Baroda and with other mid-tier public banks has declined sharply and is closer to the best of times.
On the other hand, SBI’s discount with HDFC Bank has narrowed sharply as well. The outperformance with private banks might be slower, but analysts believe that there is headroom as well.
“We are building in a call that the extent of the differential in return ratios, loan growth, NIM and credit costs is not likely to be too different in the medium term, until we have clear evidence of weak underwriting from these players. Until then, relative performance is likely to have a higher weightage in stock ideas,” the analysts added.
Among PSU banks, they believe SBI has done well to defend its market share on liabilities, while its underwriting has been better-than-expected.
In a separate report, Kotak Equities said that the valuations of other PSU banks were steadily turning less attractive.
“Tier-2 PSU banks have seen a sharp valuation re-rating over the past two years, resulting in a swift convergence in the valuations of all PSU banks closer to SBI. As a result, making an investment case for Tier-2 PSU banks has become challenging given that SBI has demonstrated a superior franchise across all key metrics: through-the-cycle credit cost, liability franchise and asset franchise,” said the brokerage report.
It continues to prefer SBI as its preferred stock within the PSU bank space, while retaining an ‘Add’ rating on Bank of Baroda and Union Bank of India.
Kotak Equities downgraded Canara Bank to ‘Reduce’ and Punjab National Bank (PNB) to ‘Sell’.
At 1:30 pm, SBI shares were trading 0.53% higher at ₹746.25 apiece on the BSE.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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