PSU banks have been on fire lately, and the majority of them have provided spectacular returns to investors, with some names becoming multibaggers in recent months. Domestic brokerage firm Motilal Oswal Financial Services (MOSL) expects the boom in state-run banks will continue.
While PSU banks have delivered significant outperformance over the last three years, and the sector has seen a significant re-rating, Motilal Oswal's recent report stated that stock valuations remain reasonable in light of business growth and profitability of about 18-19% RoE over FY24-26E.
"The combined profitability of six PSBs under MOSL's coverage will surpass 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 & SBI, thereby reaching Rs 1.7 trillion by FY26E," MOSL said.
The NSE's Nifty PSU Bank index, which tracks the performance of a dozen public sector banks, has nearly doubled from its 52-week lows. Among the index constituents, Indian Overseas Bank has gained over 220 percent, while the Central Bank of India has gained more than 190 percent from its 52-week lows thus far.
Punjab & Sind Bank and Punjab National Bank (PNB) have also gained up to 185% each. UCO Bank (160 percent up), Union Bank of India (145 percent up), Canara Bank (114 percent up), Bank of India (105% up), and Indian Bank (105% up) have all posted multibagger gains.
Even the largest PSU lenders have shown strong results. Bank of Baroda has risen more than 75% from its 52-week lows, while State Bank of India (SBI), India's largest public sector lender, has risen more than 51%.
"We believe that while NIMs may remain range-bound with a slight downward bias, the improvement in opex ratios, scope for further credit cost reduction (barring SBI), and a healthy treasury performance will enable the sector RoA to reach about 1.2 per cent by FY26E," Motilal said.
Analysts at the brokerage observe that, given PSBs' valuation history, their trading multiples appear confined; nonetheless, the quality of earnings, growth forecast, and broader re-rating in PBs will enable the sector to perform consistently. Several PSBs have raised financing from the market, which should boost company growth, especially once the capex cycle resumes following the elections.
"We believe that prolonged and consistent performance on return ratios, together with a favorable macroeconomic environment, can support further sector re-rating. We retain our overweight position on the sector and move our PTs to FY26," it added, naming SBI and Union Bank of India as its top picks in the sector, with revised target prices of Rs 860 and 175 respectively.
It also has buy recommendations for Bank of Baroda (new target price of Rs 310), Indian Bank (goal price of Rs 600), and Canara Bank (target price of Rs 650). However, it remains 'neutral' on Punjab National Bank, valuing it at Rs 115 per share.
