psu bank: Missed? Chance to catch another PSU bank bus beckons

Public sector banks have rallied over 60% and have outperformed their private peers over the last 12 months and yet their valuations offer comfort. Investors who missed it earlier now have the opportunity to board the PSU bank bus offering attractive entry points to long term investors.

Index returns by 12-stock Nifty PSU Bank is to the tune of 32% over a 1-year period which is higher than 11.36% returns delivered by Nifty Bank and 19.57% by broader Nifty50.

Individually, Punjab National Bank (PNB), Central Bank of India and Union Bank of India have given returns of 66%, 62% and 51%. Other including Bank of Maharashtra, Indian Bank, Canara Bank, Indian Overseas Bank (IOB), UCO Bank Bank of India, Bank of Baroda (BoB) and State Bank of India (SBI) have given income of 49% and 4.27% during this period with index heavyweight SBI featuring as the biggest laggard.

PSU banks remain beneficiaries of a benign macro with valuations offering comfort, JM Financial said while picking SBI and BoB as its top bet. “PSU banks have seen meaningful improvement in valuations (30%/22% premium to 5/10 year average) given that RoAs have normalised. While incremental valuation upsides are contingent to RoA upticks for PSU banks, a benign macro should aid stock performance,” JM Financial said.

Also, pivot to retail/SME by is driving a granular asset mix thus reducing concerns on asset quality to a large extent. This, in addition to inexpensive valuations (in the context of delivered RoEs), have resulted in strong outperformance by this pocket.

“In the last six months, PSU banks have been a star on the Street and performing better than the private sector banks. These last two years, especially the last six to seven quarters, have been PSU banks. The numbers have been better and what the management has guided, most of the banks have delivered that way,” Rahul Shah, analyst at Motilal Oswal Financial Services told ET Now.

On why, PSU bank stocks are offering, Shah said that PSU banks have been hammered and not been given fair value in the last so many years and hence most of them are still trading at one-time book. He thinks there could be a good upside from here.Fundamentally, the NPA cycle has peaked and it looks like the asset quality will continue to improve, Shah said as he expects growth to come henceforth. His preferred picks are SBI, followed by Canara Bank and PNB which could grow another 30% despite the current uptick.

Key Risks

While deposit growth has picked up meaningfully over the last 2 quarters, JM expects the situation to remain tight given continued buoyancy in credit, tighter liquidity conditions and attractive returns in other asset classes.

We observe that PSU banks’ earnings have meaningful sensitivity to NIM compression versus private banks and as such in a declining lending rate cycle, private banks are likely to be better placed.

JM Financial: Stocks to buy

— BOB: Buy | Target: Rs 270 | Upside: 15.2%

— Central Bank: Buy | Target: 485 | Upside: 5%

— PNB: Hold | Target: Rs 88 | Downside: 9.5%

— SBI: Buy | Target: Rs 800 | Upside: 24.6%

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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