SBI shares good structural bet, other 2 PSU bk stocks near-term bets: Brokerage

Market


PSU banks outperformed Bank Nifty by 46%/107% over the last 1/2 years driven by improving loan growth, expanding net interest margins (NIMs) and improving asset quality, highlighted domestic brokerage and research firm Ambit.

“Moreover, most PSBs are losing market share in loans/deposits/payments and their asset quality performance during Covid does not indicate structural improvement in under-writing capabilities. That said, higher liquidity buffers and a floating rate loan book should benefit PSBs in the short term in maintaining loan growth/NIMs. Also, a benign asset quality cycle should keep credit costs low. Combining short-term earnings drivers and structural strength of the franchise, State Bank of India (SBI), Bank of Baroda (BOB) and Bank of India (BOI) are better placed PSBs,” the note stated.

SBI is a good structural bet whereas BOB and BOI are near-term bets, said Ambit. “SBI scores well across parameters with stable to improving market share in loans/liabilities/payments, high provisioning coverage of 66% on stressed loans and reasonable liquidity buffers on the balance sheet. SBI is amongst our preferred picks in the sector.”

Whilst BOB lost some market share in loans and saw higher deterioration in asset quality during Covid, it scores well on balance sheet liquidity, quality of liabilities, fee income/payment capabilities and 61% coverage on stressed loans. Whilst BOI scores poorly on digital payment/capabilities, it scores well on asset quality, balance sheet liquidity, strength of the liability/asset franchise, the brokerage added.

“Higher fee income has been a key driver of high profitability for private sector banks. Fee income is also a measure of ability to cross-sell products and engagement with customers. SBI/BOI scores well on this front,” it said.

After going through a purple patch between FY03-14, PSU banks went through a tough phase between FY16-19 due to significant asset quality deterioration in corporate loans.

“However, profitability of PSU Banks started improving from FY21 with average ROA/ROE of 0.6%/10.1% in 1HFY23. The improvement in profitability resulted in PSU Bank Index outperforming Bank Nifty from Dec 2020. Outperformance significantly increased in the last few months,” the brokerage highlighted.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.


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