PSU bank stocks new darlings of Dalal Street, but how long will they keep this title?

In the last one year, even as volatility led to muted returns in benchmark indices, the stocks that compensated for most of it were that of public sector banks.

One can safely say that FY23 was the best ever for PSU banks both in terms of earnings as well as stock performance.

Many of the banks, including sector leader State Bank of India, posted their highest-ever profits in FY23. Moreover, at least four stocks have turned multibaggers in one year.


“We believe the public sector banking stocks have gained momentum amongst investors as they have detached themselves from the conventional structure to the modern age system where they have been focusing on the new age digital banking system,” Swapnil Shah, director of Research at Stoxbox told ETMarkets.


Shah said that most of the large public sector banks are in a better position when it comes to liquidity, having surplus standard liquidity ratios (SLRs) to accommodate business growth.

The strong gains in public sector banks saw the Nifty PSU Bank index surge 65% in the last 1 year, outperforming the Nifty Private Bank index by a wide margin, which has gained 33% in the same period.

“The PSU banks who were once an orphan, have become the market’s darlings in recent times,” Veer Trivedi, Research Analyst, SAMCO Securities, said.

Public sector banks have not beaten the benchmark but also many of their private sector counterparts. IDFC First Bank is the only stock in the private sector space to give multibagger returns in the last 1 year.


Narrowing Valuation Gap
The stellar run that public sector banks had in the last one year has helped in narrowing the valuation gap with private sector banks.

The average price-to-book of PSU banks stands at 1.01, which has increased by 56% over their 5-year average. Whereas, the average P/B of private banks stands at 2.07, witnessing only an 8% increase versus their 5-year average, Trivedi pointed out.

Despite the rally, PSU banks have a lot of steam left for a further upside, believe analysts.

“It’s critical to understand that this leg of re-rating of PSU banks was on the back of improving macro conditions and a cleaned-up balance sheet. The next leg of re-rating would be based on a consistent improvement in the quarterly results,” Trivedi said.

Stock Picks
Seeing more room for an upside in stocks of public sector banks, Shah of Stoxbox is betting on Bank of Baroda and State Bank of India.

Despite the interest rates peaking, Shah is confident of SBI achieving credit growth between 12-14% in FY24. The firm has a target price of Rs 650 for the stock, which implies an upside potential of nearly 13% from the current levels.

For Bank of Baroda, the firm has a target price of Rs 220, implying an upside potential of more than 17% from the current levels.

For Samco Securities too, SBI and Bank of Baroda remain the top bets in the public sector banking space.

So, it does look like FY24 will also turn out to be one to remember on a good note for PSU banks.

(Data inputs from Ritesh Presswala)

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