PSB stocks sustain rally on hopes of another re-rating

Public sector banks have continued their good run on the bourses this year with the Nifty PSU Bank index gaining 33 per cent in the year to date. For two- and three-year periods, the index is up 123 per cent and 226 per cent, respectively.

“The difference in financials and asset quality between public and private sector banks has shrunk over time. PSBs were available cheap compared to the private sector banks. Now that gap is being narrowed, resulting in a rally,” said Deepak Jasani, head of retail research at HDFC Securities.

Supporting factors

According to him, public sector banks are trading at a price to adjusted book value of 0.8-2x compared with 1.4-4x for their private sector peers. The former’s asset quality has remained stable, the government has been giving more freedom to the bank management and the banks have made great strides on the technology front.

Also read: Public Sector Banks may see further consolidation

PSBs have demonstrated significant improvements in their operating parameters and may be set for another round of rerating.

“A reflection on PSBs valuation history may cause trading multiples to look constrained. However, the quality of earnings, growth outlook and broader re-rating in PSU entities will nevertheless enable steady performance of the sector,” said a recent note by Motilal Oswal Financial Services.

Select PSBs now guide for RoA of 1.2 per cent in FY25 which implies scope of continued earnings upgrade. Over FY23-26, the brokerage estimates earnings CAGR of 24 per cent for PSBs versus 19 per cent for private banks (adjusted for HDFC Bank merger).

Also read: Sensex will hit 1 lakh in 4 years, says Anand Rathi

Several PSBs have raised capital from the market and have a healthy tier-1 ratio, which should aid business growth, particularly as the capex cycle revives post general elections.

Bright outlook

Analysts expect PSBs to sustain ongoing earnings traction, aided by improved loan growth, margin stability and controlled credit costs, driving continued rerating of the sector.

Also read: Will IREDA stock be a redux of IRCTC at the bourses?

“PSBs will continue to do well in CY24 unless the economy starts to falter. The buzz around merger and privatisation also augur well for these stocks. The gap in valuations between PSBs and private sector peers, however, will remain because of the greater nimbleness and professionalism shown by private sector banks,” said Jasani.

RBI, in its December policy, has upgraded FY24 GDP growth estimate to 7 per cent year-on-year versus 6.5 per cent in its September policy. It projects GDP growth at 6.5 per cent for Q3FY24 and 6 per cent in Q4FY24. The high frequency indicators for October and November also suggest continued robust growth.

“Upward revision in GDP growth forecast and an unchanged monetary policy stance are likely to have a positive impact for banking stocks,” said a note by ICICI Securities.

Leave a Reply

Your email address will not be published. Required fields are marked *