PSBs in focus; UCO Bank, Indian Overseas, Union Bank surge over 5%

Motilal Oswal Financial Services believes that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks.

Shares of public sector banks (PSBs) were in focus with the Nifty PSU Bank index gaining 2 per cent in Monday’s intra-day trade on value buying amid expectations of improved business/earnings outlook.

UCO Bank, Indian Overseas Bank and Union Bank of India rallied between 5 per cent to 7 per cent. Punjab and Sind Bank, Central Bank of India, Bank of Maharashtra, Bank of India, Punjab National Bank and Indian Bank were up in the range of 2 per cent to 5 per cent.

At 11:09 AM; the Nifty PSU Bank index, top gainer among sectoral indices, was up 1.8 per cent at 4,353.80, after hitting intra-day high of 4,364.95 on the National Stock Exchange (NSE). In comparison, Nifty 50 was up marginally by 0.08 per cent at 17.971.

Nifty PSU Bank index has corrected nearly 6 per cent from its all-time high level of 4,617.40, touched on December 15, 2022.

Amid the decline on the index, shares of Punjab and Sind Bank and Central Bank of India declined 26 per cent and 23 per cent, respectively, from their respective 52-week highs level. Union Bank of India and UCO Bank were down around 13 per cent each.

The brokerage firm Motilal Oswal Financial Services (MOFSL) continues to believe that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks. “We note that while the improvement in RoE’s has been encouraging, a sharp moderation in NNPA ratio has resulted in a much higher increase in ABVs. Thus, ABV for top seven PSB’s is likely to grow at 12-23 per cent range over FY22-25E v/s 14-19 per cent for top private banks. Valuations thus appear attractive considering the growth/profitability outlook,” MOFSL said in PSBs sector update.

According to brokerage firm PSBs have come a long way over the past five years with profitability of top seven PSB’s under our coverage improving to an estimated Rs 90,900 crore in FY23 from a loss of Rs 59,400 crore in FY18.

Analysts at MOFSL estimate the top seven PSBs to report a profit after tax (PAT) of Rs 1.3 trillion in FY25 v/s a loss of Rs 59,400 crore in FY18 thereby driving FY25E RoA/RoE to 0.9 per cent/14.2 per cent, respectively. ABV for these PSB’s is likely to grow higher at 12-23 per cent range over FY22-25E v/s 14-19 per cent for top private banks. The brokerage firm believes that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks.