Despite a decent Q1 performance, PSU bank stocks have struggled over the past month, falling nearly 6% (as of August 13), with concerns over valuations in the overall PSU sector weighing on the market. Experts ETMarkets spoke to anticipate stock-specific action rather than a runaway rally. Here’s why!
Barring State Bank of India (SBI), which reported a 1% year-on-year (YoY) increase in its June quarter net profit, all other public lenders have posted double-digit growth. Notable gains include Punjab National Bank (PNB) with a 159% YoY increase, Uco Bank with a 147% YoY rise, and Central Bank of India (CBI) with a 111% YoY growth. The remaining banks have shown growth between 10% and 47%.
Five banks reported double-digit growth in net interest income (NII): Punjab & Sind Bank (PSB), Bank of Maharashtra, UCO Bank, Central Bank of India (CBI), and Punjab National Bank (PNB). PSB led with a 23% year-on-year increase, followed by 20%, 12%, 12%, and 10% from the others, respectively.
All of them reported a decline in net non-performing assets (NNPAs), with improved profitability driven by better net interest margins (NIMs).
Valuation-wise, the average price-to-book (P/B) ratio for PSU stocks is 1.8. Union Bank of India and Bank of Baroda (BoB) have the lowest P/B ratios at 1, followed by The Jammu & Kashmir Bank at 1.1. The highest P/B ratios are for Indian Overseas Bank (IOB) and Punjab & Sind Bank (PSB), at 4.6 and 2.5, respectively. India’s largest lender, SBI, has a P/B ratio of around 1.8.
“In the current market environment, where valuations in many sectors appear stretched, PSU banks stand out as being available at more attractive valuations. Despite the recent run-up in prices, many PSU banks are still trading at reasonable price-to-book ratios, particularly when compared to their private sector peers. This makes them a compelling investment opportunity, especially for those looking for value in an otherwise expensive market,” Narinder Wadhwa, Managing Director of SKI Capital said.
The growth outlook is positive for banks in a medium to longer-term perspective but going ahead it is going to be a stock stock-specific market than the whole basket of PSU bank stocks, Kranthi Bathini, Director-Equity Strategy at WealthMills Securities said.
On Q1 earnings, Bathini said that PSU bank posted a good set of numbers without any negative surprises, witnessing traction in revenue growth in a high interest rate environment. Moreover, the asset quality exhibited positive trends as both gross non-performing assets (GNPA) and net non-performing assets (NNPA) declined to their lowest levels in a decade, he added.
Additionally, the Capital to Risk-Weighted Assets Ratio (CRAR) remained comfortably above the regulatory limit, the WealthMills Director said, calling it an “achievement” and attributed it to the concerted efforts on enhancing asset quality, embracing digitalisation and implementing strategic reforms at various levels.
With PSU banks posting strong numbers for the April-June quarter and an average return of 60% over the past year, is the sector ready for the next rally? Or will stocks hit a valuation wall due to growth headwinds, including slippages and margin contraction? Here’s what experts share with ETMarkets.
Master Capital Services described the Q1 earnings of PSU banks as mostly stable, with asset quality remaining steady. However, sequential increases in MSME and retail slippages and lagging deposit growth were noted. Regarding valuations, Master Capital observed that some stocks seem supportive based on their Q1 earnings and growth outlook, while others are trading at higher book value multiples, warranting careful consideration.
Meanwhile, Rahul Ghose, CEO of Hedged.in sees the overall earnings of PSU banks as a mixed bag. However, he does not see material upside in them given the markets are at their high point.
“Even the ones which had better than expected numbers are unlikely to see a run-away rally from here. The markets are at a high point right now, if there is a leg on the upside still left on the index, this would be the last leg of it,” he opined.
While the Nifty PSU Bank index has rallied more sharply than the broader Nifty, and despite its recent underperformance, it still boasts a 1-year return of around 50%. This compares to 24% for the Nifty 50 and 21% for the S&P BSE Sensex. However, its recent decline has been steeper than that of the headline indices.
Over the past month, the Nifty PSU Bank index has declined nearly 6%, while the Nifty has fallen by 1.5% and the Sensex by 2%.
Concerns have arisen as the index has lagged for consecutive months since May, when it fell by 2.8%, according to Trendlyne. This was followed by a 0.27% decline in June and a 0.42% gain in July. So far in August, the index has plunged by approximately 8%.
Experts have selected specific stocks, and here are their recommendations:
Stocks to buy:
— Bathini recommends SBI, Bank of Baroda (BoB), and Canara Bank as his top picks, with a potential upside of 15% to 20% from current levels.
— Among Master Capital’s buy recommendations is SBI, with a target price of ₹850, as they expect the state-run bank to maintain a steady RoA around 1%.
— Ghose’s top picks in this sector are SBI and Indian Bank for a medium-term perspective. However, he advises targeting specific levels for purchasing these stocks.
— Narinder Wadhwa
SBI: Buy | Target: Rs 1,050 – Rs 1,159
Strong fundamentals, diversified business model, and leadership position make SBI his top pick.
BoB: Buy | Target: Rs 275 – Rs 280
Consistent performance, improving asset quality, and focus on digital transformation make it a good buy.
Canara Bank: Buy
Strong Q1 numbers and improving operational metrics augurs well for further growth.
PSB: Buy | Target: Rs 75-80
Targets are based on the current market conditions.
(Data: Inputs from Ritesh Presswala, Trendlyne)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)
