PSU banks set for re-rating, Motilal Oswal raises target prices for SBI, PNB, BoB

State-run banks are poised for a re-rating, supported by earnings traction, improved loan growth, margin stability, and controlled credit costs, said analysts at Motilal Oswal Financial Services (MOFSL), while raising share price targets across public sector banks. The brokerage firm also shared a 'buy' rating across PSB counters.

The SBI share price target was raised to Rs 800 per share from Rs 700, implying an upside of 23 percent from the last closing price of Rs 647. The Bank of Baroda’s stock target price was upgraded to Rs 280 per share from Rs 240, implying an upside of over 25 percent from last closing price (Rs 223). Indian Bank's target price was raised to Rs 525 per share from Rs 460, signalling an upside of 18.5 percent from last close (Rs 443).

Union Bank, Canara Bank, and Punjab National Bank's target prices were also raised to Rs 150 (from Rs 130), Rs 550 (from Rs 440), and Rs 90 (from 75), respectively. However, analysts shared a 'neutral' call for PNB as the lender did not achieve a 1 percent return-on-asset (RoA) mark since FY21 earnings turnaround.

"Select PSBs are guiding for 1.2 percent RoA while our current earnings projection indicates FY25 RoAs to remain in the range of 1-1.1 percent, implying the scope for further upgrades. Over FY24-26, we estimate earnings CAGR of 21 percent for PSBs even as we pencil in higher credit costs," analysts at MOFSL underlined.

So far this year, shares of SBI, BoB, Canara Bank, PNB, Union Bank, and Indian Bank have surged in the 5-60 percent range. In comparison, the Nifty PSU Bank index climbed over 32 percent during the same period.

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PSBs earnings pool to grow to Rs 1.7 lakh crore by FY26

Over the past few years, PSBs have transformed themselves into better and more sustainable franchisee, said analysts. With consistent earnings normalisation, the profitability of PSBs are estimated to grow to Rs 1.7 lakh crore by FY26 from Rs 57,300 crore in FY22.

"We estimate a 22 percent earnings CAGR over FY23-26, with RoA or RoE improving 1.2 percent/18 percent by FY26," the brokerage firm added.

LCR ratio at comfortable levels

Across the banking sector, deposit growth has seen some revival in the past few quarters due to higher interest rates and increased efforts of lenders to mobilise deposits.

Analysts estimate the state-run lenders to report 10 percent CAGR in deposits over FY23-26 as they are well-positioned in terms of liquidity, with LCR well above regulatory requirement of 100 percent (135-160 percent).

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Higher mix of MCLR to shield PSB margins

The banking sector's margins have been marred due to higher cost of deposists due to re-pricing.

However, PSBs have been able to manage better margins as most of their loans are linked to MCLR, which has led to delayed re-pricing of advances portfolio. "While the cost of credit might continue to inch up, we believe PSBs will be able to report resilient margins, benefitting from the residual MCLR re-pricing of their lending portfolio," the broker said.

Asset quality ratios steadily improving

After Covid-19, asset quality of PSBs have been steadily improving, supported by improved underwriting, said analysts.

Gross non-performing asset (GNPA) or net non-performing asset (NNPA) ratios of PSBs have declined to 5.2/1.3 percent in FY23 from a peak of 14.6/8 percent in FY18. "With stress largely recognised and no large ticket size account under stress now, we expect the asset quality ratios to improve further in coming quarters. This will keep credit costs under control and support overall profitability," it said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.