PSU Banks – Start of a structural re-rating?
PSBs to come out from a long spell of ‘investor aversion’, one needs to be selective though
We believe that measures announced by the government may sustainably change investment sentiment around the PSBs. The very near term positive being the immediate infusion of Rs. 20,000cr capital which would increase the Tier-1 capital ratio of the receiving banks by 30-60bps. Also, recent trends at some of the large PSBs indicate that asset quality stress has been stabilizing and which is corroborated by management commentary of achieving lower NPL level by the end of year. Enhanced capital base and a gradual improvement in economic activity should help PSBs in accelerating growth. In the longer term, a stronger management, an active board, well-defined strategy and the need to perform efficiently for seeking capital should drive profitable growth for these banks. A favourable turn of the credit cycle will also help in uplifting RoEs from the current low levels. If the envisaged scenario were to transpire, the larger PSBs have an advantage to start with. Relatively higher return ratios, better capital structure, stronger loan-deposit profile and higher provisioning coverage levels work in their favour in attracting credible private sector talents and capital from the government.
Valuation of PSBs had become opaque due to sizeable standard restructured assets, some of which could potentially turn NPLs in the event of economic recovery turning out to be slower than expected. Therefore, it becomes a must to assume higher provisioning on them while arriving at the adjusted book value. Based on the above, we find PSBs trading in the range of 0.8-1.8x current P/ABV. Looking at valuation in the context of fundamentals, we believe that SBI, BOB, Indian Bank and Union Bank represent attractive long term investments.
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