PNB, Canara Bank, SBI, BOB, BOI: 2 PSU Bank Stocks for 14-17% Upside
InCred Equities has identified Punjab National Bank (PNB) and Canara Bank as two public sector banks (PSUs) with significant upside potential.
- PNB is expected to benefit from benign credit costs and favourable recoveries in written-off accounts.
- Canara Bank is projected to see a moderation in credit costs and is supported by attractive valuations.
InCred Equities forecasts that profitability across PSU banks will moderate.
- This is due to limited scope for downward repricing on savings account deposits, which make up approximately 30% of average interest-earning assets.
- Additionally, any significant gains from the marginal cost of funds-based lending rate (MCLR) are unlikely due to increased competition in pricing.
Preference for Private Sector Banks
The brokerage firm has expressed a preference for private sector banks over state-owned ones.
- This is due to their stronger liability franchise, better growth potential, and more attractive valuations.
- While private banks are favored, state-owned entities (SOEs) like PNB and Canara Bank have been identified as preferred picks among PSU banks.
Bank of India (BoI), SBI, and Bank of Baroda (BoB)
State Bank of India (SBI) and Bank of Baroda (BoB) are recognized as strong franchises among SOEs.
- However, both banks received a ‘Hold’ rating from InCred Equities, mainly due to concerns about their valuation.
- Bank of India (BoI) has also been assigned a ‘Hold’ rating due to low liquidity and limited profitability.
PSU Bank Performance and Outlook
PSU bank stocks saw a notable rally between March 2021 and July 2024, outperforming their large private sector counterparts.
- This growth was driven by improvements in balance sheets, easing credit costs, and strong growth.
- Non-core income also played a crucial role in boosting profitability during this period.
However, over the last six months, SOE stocks have seen a 15% decline from their July 2024 levels.
- This decline is attributed to concerns about growth, margin outlook, and uncertainty surrounding repo rate cuts.
- Valuations for SOE stocks have re-rated from 0.6x to 1.3x one-year forward price-to-book value, but meaningful re-rating seems unlikely unless volume growth and margin performance improve.
Growth Prospects for PSU Banks
In the third quarter, PSU banks recorded 14% YoY growth.
- Going forward, growth prospects for these banks will be closely tied to balance sheet liquidity and their ability to mobilize deposits.
- InCred Equities expects non-SBI SOE banks to achieve growth of 12–13% over FY26F/27.
Overall, PNB and Canara Bank stand out as top picks among PSU banks for their growth potential and valuation attractiveness.
- However, SBI, BoB, and BoI face challenges that may limit their upside in the current market conditions.
