What lies ahead for PSU Bank after sector surges 70% in 6 months – SBI, BoB, Indian Bank may still give up to 25% returns

SBI, BoB, Indian Bank share price: The stellar run-up of public sector undertaking (PSU) banks has made market participants sit up and take notice of the sector, as the Nifty PSU Bank zoomed 70 per cent in the last six months against Nifty Bank gained over 27 per cent and Nifty50 up 14 per cent during the same period.

The extensive rally of state-owned banks can be attributed to a turnaround with comfort on asset quality; reversal of treasury losses, credit growth pick-up, and just adequate capital position for most of them, Vishal Narnolia, Research Analyst at ICICI Securities said.   

With such a sprint by the public sector banks, what is in store for the sector and PSU Bank stocks ahead, the domestic brokerage decoded.

Asset Quality Ration Improving

The asset quality trend continued to improve led by healthy recoveries and steady incremental slippages. Absolute GNPA and NNPA declined 16 and 30 per cent Year-on-Year, respectively, in the second quarter of the financial year 2022-23 (Q2FY23).

Credit Growth Back To 20% For PSU Banks

Loans recorded growth of 20.4 per cent YoY, 4.8 per cent quarter-on-quarter QoQ to Rs 120.4 lakh crore. However, PSU banks saw growth surging to 20.1 per cent in Q2FY23. Business momentum is healthy, attributable to robust demand in the retail and Micro and Small Medium Enterprise sector.

Management commentaries and data indicate a revival in utilisation of working capital (WC) limits. Thus, we believe bank credit growth should continue to remain at 15-16 per cent with PSU banks at 12-15 per cent, going forward.

Margins, Profit, Return Ratios Going Northwards

PSU banks reported 20 per cent YoY and 13.6 per cent QoQ growth in NII (net interest income) — highest in last eight quarters. The overall management commentary suggests margins will remain steady at the current level in the second half of FY23.

Valuations Still Reasonable

Going ahead, the return on assets (RoA) for large PSU banks is seen inching towards 0.8-1 per cent 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 and mid-sized and small banks, currently trading at 0.5-0.7x P/BV.

Stocks to Buy: SBI, BoB and Indian Bank

ICICI Securities is bullish on the government-owned bank stocks such as SBI, Bank of Baroda and Indian Bank as it maintained Buy on these stocks with a target price of Rs 750, Rs 220, and Rs 335 per share, respectively, implying up to 25 per cent from today’s closing.