PSU banks’ valuations still reasonable despite sharp re-rating, says Motilal Oswal; SBI, Union Bank among top picks
₹5.3 lakh crore in March 2021 to ₹17 lakh crore in February 2024. Meanwhile, the market cap of private banks over the similar period has grown just 43% to ₹30.4 lakh crore in February 2024 (despite the HDFC-HDFC Bank merger).
Despite this significant outperformance over the past three years and the sector seeing a significant re-rating, the valuations of PSU bank stocks still look reasonable in context to business growth and profitability, said brokerage firm Motilal Oswal Financial Services. Also Read: Stocks to buy: Maruti Suzuki, M&M, TVS Motor among top picks in auto sector by HDFC Securities It expects the combined profitability of six PSBs under its coverage, including State Bank of India (SBI), Bank of Baroda, Punjab National Bank (PNB), Union Bank of India, Indian Bank and Canara Bank, to surpass ₹1 lakh crore in FY24.
The brokerage also estimates aggregate earnings of these PSBs to register a CAGR of 21% over FY24-26E (boosted by PNB & SBI), thereby reaching ₹1.7 lakh crore by FY26E. “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 ~1.2% by FY26E," said Motilal Oswal.
Considering the valuation history of PSU Banks, their trading multiples may look constrained now. However, the quality of earnings, growth outlook, and broader re-rating in Public Sector enterprises will enable steady performance for the sector, it added.
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