SBI, Canara, PNB, Bank of Baroda, Union Bank shares: Motilal sees further re-rating on PSU banks

Domestic brokerage Motilal Oswal Securities said that a sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating for the PSU banks. In a strategy note, the domestic brokerage said several PSU banks have raised capital from the market and have shored up their capitalisation levels, which would enable healthy balance sheet growth, particularly as the capex cycle recovers after the general elections. State Bank of India (SBI), Bank of Baroda and Canara Bank are its top picks from the public sector banks (PSBs).

"PSBs have demonstrated significant improvements in their operating parameters and the combined profitability of six PSBs under our coverage has thus improved to Rs 91,200 crore in FY23 from a loss of Rs 29,500 crore in FY18. We estimate PSBs to sustain ongoing earnings traction, aided by improved loan growth, margin stability and controlled credit costs thus driving continued rerating of the sector," Motilal Oswal Securities said.

A reflection on PSBs valuation history may cause trading multiples to look constrained, it said. That said, the brokerage said the quality of earnings, growth outlook and broader re-rating in PSU entities will nevertheless enable steady performance of the sector. Except for Punjab National Bank, the brokerge has ‘Buy’ rating on the remaining five PSU bank stocks under its coverage. They included Indian Bank, Union Bank of India, Bank of Baroda, SBI and Canara Bank.

Also read: Top stocks to watch on December 19, 2023: Vedanta, HCL Technologies, GMR Airports, Aurionpro Solutions, Mysore Paper Mills and more

The brokerage has introduced FY26 earnings estimates and has rolled forward its target prices for its PSBs coverage universe.

"Select PSBs now guide for RoA of 1.2 per cent in FY25 which implies scope of continued earnings upgrade. Over FY23-26, we estimate earnings CAGR of 24 per cent for PSBs versus 19 per cent for private banks (adjusted for HDFC Bank merger). We believe that the changing narrative on interest rates may further fuel the sector earnings & growth outlook," it said.

For top six PSBs under Motilal's coverage, the broking firm estimate profit after tax of Rs 1.5 lakh crore in FY25 and Rs 1.7 lakh crore in FY26.

"We expect sector RoA/RoE to improve to 1.2 per cent/17.9 per cent by FY26. Several PSBs have raised capital from the market and have a healthy Tier-1 ratio, which should aid business growth, particularly as the capex cycle revives post general elections. We thus estimate adjusted BV of our coverage PSBs to grow at a healthy 16-22 per cent range over FY24-26," it said.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

Also read: Kaynes Technology India shares in focus as firm sets QIP floor price at 6% discount