“The large PSU banks – State Bank of India (SBI), Bank of Baroda (BoB), Canara Bank and Union Bank – are well provided and are hence insulated from a shock from a large account going bad,” said S Ranganathan, head of research at LKP Securities. “Recovery from bad loans is also robust. In fact, some banks are expecting up to ₹30,000 crore recovery from just written off accounts, which itself is higher than their market cap. SBI, for example, can easily rise to being valued at 1.5 times its book from about 1.1 times now due to the sheer opportunity in the future. Even small lenders like Central Bank or UCO Bank are so undervalued that an upside is almost guaranteed.”
Advantages from integration of banks, like Andhra and Corporation with Union Bank or Syndicate with Canara Bank, increasing adoption of digital technology and a wide branch network also positions them at an advantage to resume garnering higher market share, which they have been losing to private sector peers.
“Investors can no longer ignore the PSU bank story. The clean-up has happened and all PSU lenders are now well provided for,” said Siddharth Purohit, fund manager at InvesQ Investment Advisors. “With credit demand, especially retail demand so strong, they are in a good position to take advantage.”
Bankers say they are not seeing any signs of credit demand weakening.
SBI chairman Dinesh Khara projected SBI’s loan growth for the fiscal year at 14% to 16%, higher than the 10% to 12% projected at the beginning of the year, because demand from both corporate as well as retail segments remains strong.
Both SBI and BoB have reported a record net profit in the second quarter of the fiscal due to strong loan growth and falling provisions. However, not all public sector banks have done well. Delhi-based PNB reported a 63% fall in net profit, mainly due to a rise in provisions.
Although analysts are expecting state-owned bank valuations to close the gap with their private sector counterparts, they are still wary to take a long-term bet because of the operational risks associated with their government ownership.
“Government ownership brings many operational and execution risks. Also, in the long term, valuations will depend a lot on how these banks forge partnerships, create co-lending opportunities,” said a senior analyst at a private brokerage.
Also, as deposits are re-priced, all bank margins will be under pressure, which will impact even state-owned banks, said Purohit from InvesQ.
But for now, investors, especially high net worth ones, will seriously look at the undervalued state-owned banks segment to improve their returns which will pump up their valuations, Ranganathan said.
