Public Sector Banks - Well Poised For Re-Rating 2.0: Motilal Oswal

Motilal Oswal Report

Public sector banks have delivered a strong performance since FY22, with the Nifty PSU Bank Index outperforming the Nifty-50/Bank Nifty by 87%/ 78%.

We earlier resumed coverage on the entire PSB sector in CY21 enthused by their improving business/earnings outlook. We estimate top six PSBs under our coverage to report profit after tax of Rs 1.5 trillion/Rs 1.7 trillion in FY25/FY26, while sector return on asset/return on equity improves to 1.2%/17.9% by FY26E.

Several PSBs have raised capital from the market and have shored up their capitalisation levels, which will enable healthy balance sheet growth, particularly as the capex cycle recovers after the general elections.

We thus estimate adjusted book value 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.

We introduce FY26E and rollforward target prices for our PSBs coverage universe.

We thus revise our target price for State Bank of India (Rs 800), Bank of Baroda (Rs 280), Indian Bank (Rs 525), Union Bank of India (Rs 150), City Union Bank (Rs 550), Punjab National Bank (Rs 90).

Top picks: SBI, BOB and City Union Bank.

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