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Notably, since Mar’22, the Nifty PSU Bank index has surged 162% compared to 24% returns for the Nifty Private Bank index.
We note that PSBs have delivered robust ABV growth of 20% over FY21-24, surpassing the average ABV growth of 15-16% by private banks during the same period.
The ongoing asset quality improvement, enabling further moderation in credit costs should help PSBs sustain a higher ABV growth rate compared to private banks.
The market cap of PSBs has grown at a robust pace in recent years, up ~5x since FY20 at ~INR17t. Recent capital raising and prior recapitalization supported by the government have strengthened PSBs’ capital adequacy ratios, enabling them to deliver healthy loan growth and cleanse their balance sheets.
PSBs have seen a remarkable turnaround, from record losses to record profits, as their aggregate earnings crossed the ~INR1t mark in FY24.The strong earnings recovery is attributed to steady credit growth, significant improvements in asset quality, and stable to positive margins.We note that PSBs reported higher earnings in FY23-FY24 than in the past decade. PSBs’ earnings contribution to total banking sector earnings has increased to FY15 levels, even as their loan market share has declined by ~20% since then.
Market share erosion to private banks narrows sharply PSBs’ market share has declined consistently over the past years.
However, the pace of market share erosion in loans to the private sector has moderated significantly over recent years.
We note that in the past three years, PSBs lost a market share of ~300bp in loans vs. 600-800bp average loss in the preceding three-year blocks.
PSBs have delivered a notable reduction in gross NPAs, from the peak of 14.6% in Mar’18 to 3.7% in FY24E. Their PCR is estimated to improve to 78% in FY24E from 48% in FY18.
With asset quality stress largely behind, we expect asset quality ratios to improve further, with the NNPA ratio becoming broadly comparable to private banks by FY24 end. This will keep credit costs under control and support overall profitability.
PSBs maintain a controlled CD ratio, which indicates ample liquidity amid systemic pressures, even as private banks are grappling with a historically high CD ratio.
SBI, the largest PSB, has a domestic CD ratio of ~66%, while PNB is also well positioned with a CD ratio of 69%.
Barring BOB, all other PSBs in our coverage have fairly comfortable CD ratios. A high CD ratio may constrain loan growth for select private banks, while PSBs will likely remain insulated.
We thus expect the credit growth differential between private banks and PSBs to narrow over FY24-25, as high regulatory oversight on the CD ratio may compel some banks to moderate loan growth.
Here is a list of 2 stock ideas from PSB space which could give 11-13% return in the next 1 year:
State Bank of India: Buy| Target Rs 860| LTP Rs 773| Upside 11%
SBI is well positioned to deliver 13-14% loan growth over FY23-26E, aided by an improved disbursement rate for sanctioned loans and a recovery in corporate demand.
A strong liability profile with one of the lowest domestic CD ratios at ~66% will help the bank deliver healthy balance sheet growth.
We estimate a 22% CAGR in earnings over FY24-26 after a blip in 2HFY24, resulting in FY26E RoA/RoE of 1.2%/19.1%. SBI remains one of our preferred ideas in the sector.
Union Bank: Buy| Target Rs 165| LTP Rs 146| Upside 13%
Union Bank is witnessing healthy momentum in loan growth, led by traction across Corporate, Agri and Overseas credit. The bank is also observing a significant uptick in education loans.
Further, a low SMA book and controlled restructuring provide a better outlook on asset quality. We estimate loans to grow by ~12% over FY24-26E, with RoA/RoE at 1.2%/18% by FY26.
(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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