We estimate the profitability of the top six PSBs under our coverage to rise to Rs 1.7 trillion by FY26 from Rs 573 billion in FY22 and from collective losses in FY18.
We thus estimate a 22% earnings CAGR over FY23-26, with RoA/RoE improving to 1.2%/17.9% by FY26.
Across the banking sector, deposit growth has remained sluggish in the past few years but has seen some growth revival in the past few quarters.
The uptick in deposit growth is mainly attributed to higher interest rates offered by banks and their intense efforts in mobilizing deposits.
PSBs will continue to benefit from their established distribution network, strong geographical presence, and improved digital initiatives. Overall, we expect PSBs to report a ~10% CAGR in deposits over FY23-26.
Most PSBs are well positioned in terms of liquidity, with their LCR well above the regulatory requirement of 100% (135-160%), indicating their resiliency and competitive advantage over their private peers, especially in the current rate environment. PSBs saw margin compression in 1HFY24, with varying trends across banks.We, however, note that overall, PSBs have been able to maintain better margins as a significant proportion of their loans are linked to MCLR (6-12 months’ tenure), which has led to lagged re-pricing of advances portfolio.
We believe that while the cost of deposits will keep inching up for the sector, PSBs overall will be able to report resilient margins, benefitting from the residual MCLR re-pricing of their lending portfolio.
The Indian Banks Association (IBA) has recently concluded wage negotiations and has agreed to a wage hike of 17% in the 12th bi-partite settlement, effective from 1st Nov’22.
Most PSBs have made provisions of around 14-18% toward employee and retirement-related expenses and will thus have limited impact from this settlement barring SBI.
With the headcount remaining under control and productivity gains kicking in, we expect controlled cost ratios over the coming years.
We estimate the cost-to-income ratio to moderate over FY23-26E thus enabling banks to sustain healthy RoA.
After Covid-19, the asset quality of PSBs has been steadily improving, supported by improved underwriting and continued recovery from the TWO pool.
Controlled SMA book (~20bp-70bp), healthy recoveries and upgrades, and limited exposure to the unsecured segment further augur for incremental asset quality trends.
GNPA/NNPA ratios of PSBs have declined to 5.2%/1.3% in FY23 from the peak of 14.6%/8.0% in FY18, while their PCR has improved to 74% in FY23 from 48% in FY18.
The improved operating performance has helped PSBs to not just shore up capital by accessing public markets but also helped most banks see huge demand in their recent QIPs.
Most PSBs are well capitalized (CET I ratio at ~10- 13% for top seven PSBs), coupled with strong internal accruals, which will help them deliver healthy loan growth, particularly as corporate demand recovers.
We estimate PSBs to sustain earnings traction, aided by improved loan growth, margin stability, and controlled credit costs, given robust asset quality trends and healthy coverage ratios.
This will enable PSBs to sustainably deliver RoA of 1%+ over FY24-26E. Over FY24-26, we estimate an earnings CAGR of 21% for PSBs even as we pencil in higher credit costs.
PSBs have delivered a strong performance since FY22, with the Nifty PSU Bank Index outperforming the Nifty-50/Bank Nifty by 87%/ 78%.
Several PSBs have raised capital from the market and have shored up their capitalization levels, enabling healthy balance sheet growth, particularly as the capex cycle recovers after the general elections.
We thus estimate ABV for our coverage PSBs to grow at a healthy 16-22% range over FY24-26. We believe that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector.
State Bank of India: Buy | Target: Rs 800 | LTP: Rs 636 | Upside 25%
SBI remains one of our preferred picks in the sector. Business growth was healthy, with most business segments showing traction. Its loan growth remains healthy & we expect around 13% CAGR in loans over FY23-25.
The corporate segment has a lending opportunity of ₹4.8t, while SMEs book to scale up to >₹4t. We estimate the bank to deliver FY25E RoA/RoE of 1.1%/18.3%.
Bank of Baroda: Buy | Target: Rs 280 | LTP: Rs 223 | Upside: 25%
With a healthy CET-1 ratio of ~12%, BOB appears to be well capitalized for incremental growth opportunities, likely to be driven by retail loans.
The corporate book is witnessing a healthy recovery and is likely to sustain the momentum, resulting in healthy loan growth. The bank expects the total to grow 14-16% in FY24E.
(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)