Top picks: ICICI Sec is bullish on 3 PSU bank stocks amid reasonable valuations

“A stellar run up by PSU banks had all eyes glued towards them. We tried to analyse the factors leading to the rally and what is in store ahead. Bank Nifty gained ~28% whereas PSU banks were up 74% in the last six months (as of December 21, 2022). Post the phase of significantly higher GNPA, treasury MTM losses, lower capital & sub-par growth, there has been a turnaround with comfort on asset quality; reversal of treasury losses, credit growth pick-up and just adequate capital position for most of them. Despite the decent rally, valuation still look reasonable for PSU banks,” said the research analysts of the broking firm ICICI Securities.

“Going ahead, the RoA for large PSU banks is seen inching towards 0.8-1% gradually. With a recovery in growth and stable asset quality, PSU banks are set for a further re-rating. Large PSU banks (SBI, BoB, Canara Bank) are trading at ~0.8-1x P/BV, which paves the way for a further re-rating as peak valuations remain at ~1.2-1.5x in FY12-14. Mid-sized and small banks, currently trading at 0.5-0.7x P/BV, touched ~1x then. We remain positive on PSU banks, with upsides expected to continue in the medium term horizon,” they said.

“SBI, after getting impacted by corporate NPAs, has reported a consistent improvement in business growth as well asset quality. Accelerated growth, steady margins and lower credit cost are expected to drive RoA further. Thus the stock, long due for re-rating, should see strong positive momentum. Hence, we retain our BUY rating on the stock. We value the bank at ~1.25x FY25E ABV and subsidiaries at ~ ₹183/share to arrive at a revised target price of ₹750 from ₹700 earlier,” said the analysts.

“Bank of Baroda has reported a continued improvement in business growth as well as asset quality, which is expected to aid return ratios and, thus, valuations. We retain our BUY rating on the stock. We value the bank at ~1.1x FY25E ABV and revise our target price to ₹220/share from ₹170/share earlier,” the brokerage note stated.

For the shares of Indian Bank, the analysts said “Continued healthy credit momentum coupled with a gradual improvement in asset quality keeping credit cost lower to aid RoA. Further, a healthy liabilities franchise and relatively superior efficiency and capital adequacy are expected to aid improvement in RoA. We maintain our BUY rating on the stock. We value the bank at ~0.8x FY25E ABV and revise our target price from ₹300 to ₹335 per share.”

“PSU banks reported 20% YoY and 13.6% QoQ growth in NII, highest in last eight quarters. Faster transmission of rate hikes on assets compared to liabilities and healthy proportion of low cost deposits led to strong sequential rise in margins (10- 40 bps QoQ). Management commentary suggests margins will remain steady at the current level in H2FY23. Led by a strong topline and lower credit cost, net profit of PSBs grew 19% YoY and 70% QoQ at ₹26021 crore for Q2FY23 depicting improving earnings. Hence, with expected sustainability of earnings growth, return ratios are improving. RoA has reached 0.6-0.8% in Q2FY23 similar to FY14-15 levels. We expect further improvement in RoA though RoE may take longer to surge, except for SBI, BoB, Indian Bank and Canara Bank where >11% RoE is reached,” they further added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.