PSU banks’ valuations still reasonable despite sharp re-rating, says Motilal Oswal; SBI, Union Bank among top picks

The equity shares of public sector banks (PSU Banks) have seen a sharp outperformance, with the Nifty PSU Bank Index alone delivering 162% returns since March 2022, overshadowing the 24% returns of the Nifty Private Bank index over the same period.

The aggregate market capitalisation of PSU banks has increased from ₹5.3 lakh crore in March 2021 to ₹17 lakh crore in February 2024. Meanwhile, the market cap of private banks over the similar period has grown just 43% to ₹30.4 lakh crore in February 2024 (despite the HDFC-HDFC Bank merger).

Despite this significant outperformance over the past three years and the sector seeing a significant re-rating, the valuations of PSU bank stocks still look reasonable in context to business growth and profitability, said brokerage firm Motilal Oswal Financial Services.

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It expects the combined profitability of six PSBs under its coverage, including State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Union Bank of India, Indian Bank and Canara Bank, to surpass ₹1 lakh crore in FY24. 

The brokerage also estimates aggregate earnings of these PSBs to register a CAGR of 21% over FY24-26E (boosted by PNB & SBI), thereby reaching ₹1.7 lakh crore  by FY26E. 

“We believe that while NIMs may remain range-bound with a slight downward bias, the improvement in opex ratios, scope for further credit cost reduction (barring SBI), and a healthy treasury performance will enable the sector RoA to reach ~1.2% by FY26E,” said Motilal Oswal.

Considering the valuation history of PSU Banks, their trading multiples may look constrained now. However, the quality of earnings, growth outlook, and broader re-rating in Public Sector enterprises will enable steady performance for the sector, it added.

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Meanwhile, several PSBs have raised capital from the market, which should aid business growth, particularly as the capex cycle revives post general elections. The brokerage believes that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector.

Motilal Oswal maintains Overweight stance on the sector. Its top picks among PSU Banks are SBI and Union Bank of India.

It has a ‘Buy’ rating on both the stocks with target prices of ₹860 for SBI and ₹175 for Union Bank of India.

The brokerage also has a ‘Buy’ call on Bank of Baroda (TP: ₹310), Indian Bank (TP: ₹600) and Canara Bank (TP: ₹650). It has a ‘Neutral’ rating on PNB with a target of ₹115 per share.

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.