PSU banks such as Punjab National Bank Ltd, Canara Bank Ltd, Indian Bank Ltd and Union Bank Ltd have come out with their June quarter results and Investec says most of these banks have reported an improvement in return on asset (RoA), due to better-than-expected net interest margins (NIM), pre-provision operating profit and stable asset quality. Investec noted that credit costs are steadily decreasing and expected this trend to continue. PSU banks are well positioned to deliver RoA of 1 per cent, it said.
The foreign brokerage has retained its 'Buy' rating on Union Bank and Indian Bank, as it feels lower credit cost may lead to 1 per cent RoA: It has a 'Sell' rating on Canara Bank, as it believes Q1 was a steady quarter for the bank but the margin of safety is low. On PNB, it has a 'Hold' rating as it finds earnings inline but felt credit cost remains elevated.
For Indian Bank, it said substantial buffers on liquidity (131 percent in Q1) and further room for net credit costs to moderate has significant headroom to improve RoAs above 1 per cent.The brokerage has upgraded its target price for Indian Bank to Rs 400 from Rs 308 earlier.
For Union Bank, Investec estimated RoAs to be in the 0.9-1 per cent range over FY24-25E supported by lower net credit costs and moderate credit growth in the range of 12-13 per cent. It has upgraded its earnings estimates for Union Bank marginally and revised its target rpice to Rs 107 from Rs 80.
For Canara Bank, Investec continues to believe the bank has the lowest margin of safety on both P&L and balance sheet fronts, given its low liquidity cushion and capitalisation against peers and hence the risk reward is not favourable at 0.8 times despite similar RoA profile. Despite despite valuations at 0.8 time, Investic has reiterated its 'Sell' call on this stock with a new target of Rs 345.
Meanwhile for PNB, the brokerage has downgraded FY24 earnings estimates by 29 per cent, as it expects the bank will report elevated credit cost in the 1.5-1.7 per cent range as it further reduces its net non performing assets (NPAs). Investec has a target fo Rs 66 for PNB.