PSBs well poised for re-rating; MOFSL lists 3 top picks

Domestic brokerage Motilal Oswal Financial Services (MOFSL) is optimistic on public sector banks (PSBs) and sees them as potential re-rating candidates. The report by the brokerage highlighted that PSBs have logged robust performance since FY22, with the Nifty PSU Bank Index outperforming the Nifty-50/Bank Nifty by 87%/ 78 per cent.

The brokerage estimates PSBs to sustain ongoing earnings traction, aided by improved loan growth, margin stability and controlled credit costs thus driving continued rerating of the sector.

For 5 of the top six PSBs under its coverage, MOFSL has iterated a buy call with a higher revised target.

The brokerage maintained a ‘neutral’ rating for PNB as it failed to achieve the 1 per cent Return on Assets (RoA) mark since FY21 earnings turnaround.

“Return ratios of PSBs have been under pressure for the past many years, as top seven PSBs took a significant stock of provisions toward stressed accounts, which resulted in significant losses over FY16-20,” noted the brokerage.

Select PSBs are already guiding for around 1.2% RoA while our current earnings projection indicates FY25E RoAs to remain in the range of 1.0-1.1% implying scope of further upgrades. Over FY24-26, we estimate an earnings CAGR of 21% for PSBs even as we pencil in higher credit costs. We believe that treasury gains may further aid sector earnings as the rate cycle turns and will also help PSBs to strengthen their balance sheet further, added MOFSL in its report.

Wage settlement to produce limited impact

As regards the recent wage settlement, the brokerage noted that most PSBs have made provisions of around 14-18% toward employee and retirement-related expenses and will thus have limited impact barring SBI.

Top 3 PSB picks of MOFSL

So as analysts at the brokerage believe that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector, the brokerage has listed its 3 top picks from the pack including SBI, Bank of Baroda and Canara Bank.