PSBs' valuations still reasonable despite 162% jump in Nifty PSU Bank index in less than 2 years: Report

Earlier brokerage firm Motilal Oswal Financial Services (MOFSL) saw a good enough possibility of a re-rating in the PSU bank space given the good fundamentals, and now in its recent report, the brokerage highlights that despite a sharp run-up in a short span of time, PSBs (public sector banks) command reasonable valuations.

The brokerage underlined that 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 decent in context to business growth and profitability (~18–19% RoE over FY24–26E). 

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 (PSEs) will enable steady performance for the sector, the brokerage added.

Furthermore, for the six stocks under its coverage, the total profitability will go past Rs 1 lakh crore in FY24E. “We estimate aggregate earnings of our PSB coverage to register a CAGR of 21 per cent over FY24–26E (boosted by PNB and SBI), thereby reaching Rs 1.7 trillion by FY26E, noted the brokerage.

Motilal Oswal Financial Services anticipates pressure on net interest margins (NIMs) going forward. Further, it expects an improvement in opex ratios, the scope for further credit cost reduction (barring SBI), and a healthy treasury performance that will enable the sector's return on assets (ROA) to reach nearly 1.2 per cent by FY26E.

Business growth likely on fresh capital raising, positive macros; OW stance

Another trend worth noting is the raising of fresh capital by players in the domain, which will spur business growth. The brokerage says that the continued performance of PSBs on return ratios and the conducive macros will enable further re-rating of the sector. The brokerage maintains an overweight stance on the pack and lists SBI and Union Bank as its top picks.

“PSU banks are well positioned to pursue healthy growth (given ample balance sheet liquidity) and maintain resilient margins as they benefit from residual MCLR repricing. The decline in bond yields, along with continued improvement in credit costs (barring SBI), will support healthy profitability,” added the brokerage