The performance of the stocks of PSU Banks has been rather unprecedented in 2022 so far. On a year-to-date basis, the Nifty PSU Bank index is up over 67 per cent.
According to Morgan Stanley, this rally has additional legroom too. It expects continued strong performance helped by higher margins, sustained loan growth and improving operating leverage over the next few years.
“Over the past two years, Indian banks have seen sharp moderation in new NPL formation, which, coupled with increased NPL coverage during COVID, has resulted in sharp moderation in credit costs,” it said.
“In recent quarters, this has been followed by sharp improvement in margins, helped by a rising rate cycle – higher rates, coupled with retail funded balance sheets and higher shares of repo-linked loans, have led to up-front margin expansion in the current cycle. Loan books have yet to be fully repriced, which implies that margins might expand further before, then moderate in FY24,” said Morgan Stanley in its recent report.
It added that the PSU Banks should see relatively higher margin expansion than many private banks over F22-F24, reflecting a higher starting point of liquidity; sharp moderation in NPL formation, reducing interest income reversals; and lower share of wholesale deposits relative to select private banks.
SBI remains its best state-owned bank pick and the brokerage firm sees potential for notably higher stock returns in BoI and BoB due to much cheaper valuations.
Here are the top PSU bank stock picks:
1) Bank of India (BoI)
Current Market Price: Rs 90.25
Target: Rs 125
Upside Potential: 38%
2) Bank of Baroda (BoB)
Current Market Price: Rs 174.45
Target: Rs 220
Upside Potential: 26%
3) State Bank of India
Current Market Price: Rs 609
Target: Rs 715
Upside Potential: 17%
4) Punjab National Bank
Current Market Price: Rs 55.45
Target: Rs 60
Upside Potential: 9%
5) Canara Bank
Current Market Price: Rs 318.60
Target: Rs 345
Upside Potential: 8%