Weeks after upgrading State Bank of India’s target share price, global brokerage firm Morgan Stanley has now upgraded other two large PSU bank stocks to ‘equal weight’.
Weeks after upgrading State Bank of India’s target share price, global brokerage firm Morgan Stanley has now upgraded other two large PSU bank stocks to ‘equal weight’. It also increased the target prices for other PSU banks under its coverage. Bank of Baroda (BoB) and Punjab National Bank (PNB) have been upgraded, both owing to cheap valuations along with strong improvement in balance sheets and better capital ratios. Meanwhile, target prices for these two banks, along with Bank of India and Canara Bank have been raised.
The report said that BoB’s target price has been increased to Rs 100 per share, up from Rs 65 earlier; and the target for PNB has been increased to Rs 48 from Rs 35. Both BoB and PNB have been upgraded to ‘equal weight’ from the ‘underweight’ rating. Along with these two, Morgan Stanley has increased the BVPS for Bank of India and Canara Bank along with BoB and PNB, to factor in lower impairments, lower dilution, higher PPOP. The report noted that PSU banks have improved balance sheets, and that bad loan formation should moderate going forward. Cheap valuations of PSU banks, Morgan Stanley said, could result in near-term upside for these stocks.
- Nifty may head to 16,300 in August, Bank Nifty to remain positive with strong support at 34,000; SBI top bet
- Market Highlights: Sensex ends 123 points lower, Nifty closes above 15,850; Reliance Industries, SBI top drags
- Nifty may witness major breakout above 15,950; Tata Steel, ICICI Prudential find support on charts
However, among state-owned banks, the brokerage firm still prefers State Bank of India, the country’s largest PSU bank. SBI’s target price was increased from Rs 525 per share to Rs 600 apiece earlier in February.
Structural challenges remain for PSU Banks
Although PSU banks are improving their balance sheets, Morgan Stanley noted that structural challenges still persist for all state-owned banks, except SBI. “While capital ratios have improved, they are far from being impressive. This, coupled with a relatively lower coverage/PPoP implies a much lower margin of safety — at -1% to 5% against 6% at SBI and more than 10% at private banks,” analysts at Morgan Stanley noted.
PSU banks also make up for a higher share of moratorium customers and have higher corporate exposure, to add to that collection efficiency when compared to private sector banks is lower. This is Morgan Stanley’s views could result in slippages and restructuring a few quarters down the lane. Further challenges for PSU Banks stem from their underwriting practices, which have been suboptimal, according to Morgan Stanley. The note added that the share of BBB-and-below rated corporate loans remains high for PSU Banks, which could weigh on bad loan formation amid weak collection efficiency.
Facing stiff competition, PSU banks have been losing market share at an accelerated pace. The deposit market share of PSU banks has gone from 53% the financial year 2015 to 42% in the previous fiscal, raising alarm bells. The report added that the market share loss in savings deposits should accelerate given the continued focus of private banks on technology and strong expansion in rural/semi-urban markets. Similarly, the loan market share of PSU Bank has been sliding down, from 53% in 2010 to 39% in the previous fiscal.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)