PSU bank stocks witnessed a rally on April 1, driving the Nifty PSU index up by over a percent. Analysts attribute this surge to the current favorable credit environment, which has bolstered the asset quality of these banks.
Bank of America (BoFA) Securities has expressed optimism particularly towards smaller PSU banks, citing a better risk-reward profile alongside higher earnings growth and valuation upside.
Key Points:
- Conservative Estimates: BoFA Securities highlights that consensus estimates for FY25 remain conservative for PSU banks. It suggests the potential for EPS upgrades ranging from 10 to 20 percent, driven by increased confidence in consistent earnings per share and Return on Assets (RoA) delivery, along with an uptick in foreign ownership.
- Earnings Recovery Cycle: While some state-run lenders are still in the early stages of their earnings recovery cycle, others are positioned to drive positive surprises in FY2025 and FY2026.
- Foreign Ownership: The brokerage notes that foreign ownership in other state-run lenders is currently lower compared to State Bank of India (SBI) and Bank of Baroda (BoB). However, it expects this gap to narrow over time.
- Stock Performance: PSU Bank index has surged by 96 percent in the past year. Notably, stocks like Canara Bank and Union Bank of India have witnessed over 100 percent growth, while Bank of India shares have risen by 80 percent during the same period.
- Recommendations: BoFA Securities maintains a “buy” rating on smaller PSUs including Union Bank, Canara Bank, and Bank of India, with target prices of Rs 180, Rs 600, and Rs 170 respectively. However, it has a “neutral” rating for SBI and BoB, citing already optimistic earnings expectations.
- Bearish Outlook: The brokerage expresses bearish sentiment towards Punjab National Bank (PNB), assigning it an “underperform” rating with a target price of Rs 90.
Disclaimer/Source: Moneycontrol
