PNB, UCO Bank, Bank of Maharashtra & Central Bank: Have these shares run ahead of fundamentals?

Shares of PSU banks have seen a decent run up of late, thanks to improved fundamentals and low valuations. PSU banks have turned profitable after 8-9 years as balance-sheet are cleaner and incremental credit costs are lower. In a detailed note, Dalal & Broacha Stock Broking said the performance of PSU banks is better at core income level, with credit growth improving and margins expanding along-with all-time low credit costs.

The brokerage, however, prefers largecap PSU banks such as SBI, Bank of Baroda and Canara Bank over mid & small cap banks such as Punjab National Bank (PNB), UCO Bank, Bank of Maharashtra & Central Bank, as it believes latter’s positives are largely factored in.

“At current valuations, we find value in large cap PSU Banks and not in small & mid-cap PSU stocks as in the latter valuations are running ahead of the return ratios they would be generating,” it said.

The brokerage said PSU banks which have considerable pan-India presence with strong liability franchise will be able to participate in the current above average credit cycle equally. Valuations, it said, are not at peak levels signalling further room for improvement from the current levels. Largecap banks such as SBI, Canara Bank and Bank of Baroda are still better-off given reasonable valuations and healthy deposits growth, it said.

Credit offtake

Dalal & Broacha Stock Broking said unlike the general perception, credit growth for PSU banks is being equally strong recently; as they are also participating in higher credit offtake witnessed in the economy. Blended credit growth for 12 PSU banks, which form more than 95 per cent of the total PSU banks put together, was at 20.9 per cent in H1FY23 against the industry average growth of 17.2 per cent, it noted. PSU banks’ credit offtake market share in total systemic credit has increased marginally from 56 per cent in FY21 to 56.4 per cent in H1FY23.

That said, it noted that large cap banks including BOB, Canara Bank, Union Bank and BOI have seen improved market share in advances while mid & small cap banks have lost.

Deposit growth

Dalal & Broacha Stock Broking noted the PSU banks are witnessing healthy deposit growth marginally ahead of the industry, which is a key challenge for all the banks currently. Blended deposit growth for PSU banks was at 9.9 per cent in H1FY23 against 9.6 per cent industry deposit growth for the same period. The total market share of the PSU banking pack in systemic deposits has come down from 61.5 per cent in FY21 to 60.4 per cent in H1FY23.  But that is largely due to decline seen by Bank of India, PNB, Central Bank of India and IDBI Bank. Other banks including large banks SBI, BOB, Canara Bank have retained or rather increased their market share marginally.

Asset quality

Over the last 8-9 years, Dalal & Broacha Stock Broking said, PSU banks have aggressively provided for gross NPLs leading to higher credit costs,  which had impacted their profitability. GNPLs of PSU banks in absolute terms has come down by 18 per cent in last 1.5 years to Rs 4.8 lakh crore as on H1FY23, it noted.

“While the PCR of all the banks has progressed to more than 70-80 per cent levels resulting in lower incremental credit costs. Given past NPLs largely provided for, incremental credit costs outlook is likely to be benign which is likely to boost their profitability sizably,” it said,

Outlook

The brokerage expects strong PSU bank profitability is expected to continue going forward as well, thanks to pick-up in credit cycle,  which is being seen after more than a decade.

It said private investment cycle has picked up which has resulted in rise in corporate lending growth for banks. Demand is being witnessed across the sectors like infrastructure, real estate, iron & steel etc. Lending to corporations, including small, medium & large businesses was up by 12.6 per cent YoY for September, largest growth seen after 2014, it noted.

Valuations

The brokerage does not find value in mid and smallcap PSU banks.

It said PNB and Central Bank of India are likely to generate return on asset (ROA) of 0.1-0.3 per cent in FY24e while surprisingly, they are trading at 0.9-1.4 times FY24e adjusted book value (ABV). Such valuations look unreasonably high, it said.

“And similarly for UCO Bank and Punjab & Sind Bank, ROA is estimated to be at 0.7-0.9 times FY24e and they are trading at much higher valuations of 1.5 times FY24e ABV multiple (UCO Bank/Punjab & Sind Bank at 1.5 times/2 times FY24e ABV). For Bank of Maharashtra and IDBI Bank ROAs would be over 1 per cent FY24e while current valuations look to fully captures the positives (both are trading at 1.3 times each FY24e ABV). Hence, small & mid-cap banks’ valuations are running ahead of return ratios; and hence, price performance from hereon will be subdued,” it said.

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