PSBs - Sustained Profitability To Drive Stock Performance: Motilal Oswal

Motilal Oswal Report

We resumed coverage on all six public sector banks in early 2021, and followed this up with upgrading Bank of Baroda at Rs 81 in August 2021, after being 'Neutral' for four years.

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 (~18-19% return on equity over FY24- 26E).

The combined profitability of six PSBs under our coverage will surpass ~Rs 1 trillion in FY24E. We estimate aggregate earnings of our PSB coverage to register a compound annual growth rate of 21% over FY24-26E (boosted by Punjab National Bank and State Bank of India), thereby reaching Rs 1.7 trillion by FY26E.

We believe that while net interest margins 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 ~1.2% by FY26E.

Considering PSBs’ valuation history, their trading multiples may look constrained now; however, the quality of earnings, growth outlook, and broader re-rating in public sector enterprises 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 general 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 over weight stance on the sector and roll forward our target prices to FY26. top picks: SBI, and Union Bank of India.

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