PSU banks riding the credit wave to continue strong show

Mumbai: Bank of America (BofA) Securities believes the current rally in public-sector banks will continue after these lenders, weighed down with dodgy assets and growth pangs for the greater part of the past decade, logged their best pace of credit growth in eight years in the second quarter of FY23.

While BofA continues to have a positive outlook on India's largest lender State Bank of India with a neutral rating and a target price of ₹680 per share, it expects Bank of Baroda (BoB) to lead the rest of the PSU bank pack due to its diversified yet relatively safe loan book, and a more advanced digital strategy.

BofA reiterated its buy rating on BoB with a target price of ₹190 per share. This translates into an upside potential of roughly 16-17% from the current market price.


"The PSB turnaround story is finally being recognised by the market," BofA said. "We expect this turnaround to have further legs in both operational and stock performance for several reasons."

On Thursday, BoB shares advanced 0.18% to close at ₹163.60. The stock is trading around its highest levels in nearly one year. In the past month, BoB shares have gained more than 16% and yielded nearly 65% returns in the past six months.

SBI shares declined 0.22% to close at ₹598.45 apiece. In the past month, SBI has generated nearly 7% returns and is up 30% in the past six months.

Of the top 10 best-performing banking stocks, eight are PSU banks aided by the current environment of liquidity tightening, limited operational expenditure, and benign asset quality.

"PSB RoA/RoE improvement story has further tailwinds in FY24 (with) many likely to hit 14-15% RoEs," said BofA. "Valuation discounts (ex-SBI) have meaningful room to narrow (multiples still one-third of private lenders for a 10-20% ROE disc). We expect discounts to narrow further - both within PSBs and relative to private lenders."

Union Bank is the top performer in the banking universe. The stock has given 53% returns in the last month and nearly doubled since mid-May.

Bank of India and Indian Bank are other top performers in the PSU banking space. However, BofA does not have coverage on these stocks, as per its client note.

BofA said PSU banks have more tailwinds versus private lenders going into fiscal 2024.

"While loan growth (of 20% year-on-year growth in Q2) is likely to normalise, it may remain healthy at 12-15% levels on strong retail demand and pick up in the corporate segment," BofA said. "PSBs LDR (loan-to-deposit) ratio is 15% lower than private lenders and 8% lower than their peak levels, providing much room for improvement."

"Opex leverage is key differentiator...PCR (provision coverage ratio) remains healthy at 75%+, and in theory, has bigger scope for recoveries in FY24 from their still bigger legacy NPA book."