PSU banks have progressed a lot in past 5 years with profitability of of top seven PSBs improving to an estimated ₹909 billion in FY23 from a loss of ₹594 billion in FY18, said a Motilal Oswal report.
“Estimate the top seven PSBs to report a PAT of ₹1.3 trillion in FY25 versus a loss of ₹594 billion in FY18 thereby driving FY25E RoA/RoE to 0.9%/14.2%, respectively," said a recent report by Motilal Oswal.
Motilal Oswal tracks top 7 PSU banks - State Bank of India, Punjab National Bank, Bank of India, Bank of Baroda, Central Bank, Union Bank and Indian Bank and from the list its top picks are SBI, BoB and Central Bank.
The brokerage said that it forecasts private banks could see some pressure on their net interest margins (NIMs) from 1HFY24E. Meanwhile, PSU banks are expected to have a longer runway for margin expansion due to higher linkage to Marginal Cost of Funds Based Landing Rate (MCLR) and hence, their NIMs can continue to improve for a few more quarters.
“We resumed coverage on the entire pack in early FY22, enthused by their improving business/earnings outlook. We continue to believe that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks," said the report.
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The key positives for the PSU banks have been:
-Gross NPA ratio has dipped 810 bps since FY18: Over the past few years, PSBs have focused on strengthening their balance sheets and consequently the GNPA/NNPA ratio for PSBs improved sharply to 6.5%/1.8% in Sep’22 from the peak of 14.6%/8.0% in FY18, respectively.
-The brokerage expects margins to remain buoyant over near term
-The return on asset (RoA) for PSU banks has crossed about 1%: Collectively the top seven PSBs have delivered an average RoA of about 1.1% over 10 years during FY04-13.
“We expect 29% earnings CAGR over FY22–25 and estimate these PSBs’ RoA/RoE to improve to 0.9%/14.2% in FY25, respectively," said the brokerage.
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