PSU Banks have been on fire lately and most of them have delivered handsome returns to investors, with some names turning into multibaggers in the last few months. Domestic brokerage firm Motilal Oswal Financial Services (MOSL) believes that the rally in the state-run lenders is likely to continue. While PSU Banks have delivered a significant outperformance over the past three years and the sector has seen a significant re-rating, the stock valuations still look reasonable in context to business growth and profitability of about 18-19 per cent RoE over FY24- 26E, said Motilal Oswal in its recent report. "The combined profitability of six PSBs under MOSL's coverage will surpass Rs 1 lakh crore in FY24E. We estimate aggregate earnings of our PSB coverage to register a CAGR of 21 per cent over FY24-26E, boosted by PNB & SBI,, thereby reaching Rs 1.7 trillion by FY26E," MOSL said. NSE's Nifty PSU Bank index, which gauges the performance of a dozen public sector lenders, has almost doubled from its 52-week lows. Among the index constituents, Indian Overseas Bank has rallied about 220 per cent, while Central Bank of India is up over 190 per cent from its 52-week lows so far. Punjab & Sind Bank and Punjab National Bank (PNB) have also gained up to 185 per cent each. UCO Bank (160 per cent up), Union Bank of India (145 per cent up), Canara Bank (114 per cent up), Bank of India (105 per cent up) and Indian Bank (105 per cent up) have also delivered multibagger returns.a Even the largest PSU lenders have delivered strong returns. Bank of Baroda has surged more than 75 per cent from its 52-week lows, while the largest PSU lender State Bank of India (SBI) has surged more than 51 per cent. "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 about 1.2 per cent by FY26E," Motilal said. Analysts at the brokerage note that Considering PSBs’ valuation history, their trading multiples may look constrained; however, the quality of earnings, growth outlook, and broader re-rating in PBs will enable steady performance for the sector. Several PSBs have raised capital from the market, which should aid business growth, particularly as the capex cycle revives post elections. "We believe that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector. We maintain our overweight stance on the sector and roll forward our PTs to FY26," it said, picking SBI and Union Bank of India as its top picks from the sector with revised target price of Rs 860 and 175 apiece, respectively.
It also has a buy ratings on Bank of Baroda with a new target price 310; Indian Bank with a target price of Rs 600 and Canara Bank with a target price of Rs 650. However, it remains 'neutral' on Punjab National Bank and pegs its value at Rs 115 per share.
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