India’s public sector banks have seen quite the turnaround in recent years after struggling with low profits and asset quality issues for much of the last decade. A massive clean-up drive combined with government recapitalization efforts have helped these lenders get back on their feet. Now, one analyst is arguing several PSU bank shares still have room to run higher based on improved financials and valuations that remain attractive.
Motilal Oswal Securities believes State Bank of India, Canara Bank, Union Bank of India, Bank of Baroda, Punjab National Bank, and Indian Bank are all poised for another leg of re-rating in the market. These stocks rallied sharply over the past three years but the brokerage feels upside potential remains as key metrics continue strengthening.
By FY26, Motilal Oswal forecasts the aggregate net profit pool for PSU banks will grow to a massive Rs. 1.7 lakh crore from just Rs. 57,300 crore reported in FY22. Operating expenses are projected to moderate while asset quality keeps enhancing, aided by a declining special mention accounts book. Liquidity coverage ratios are now comfortable too, providing cushion against volatility.
Perhaps most importantly, achieving over 1% return on assets on a sustainable basis is increasingly becoming reality rather than just an aspiration for these banks. With stronger balance sheets and profitable operations now the norm rather than exception, PSU lenders have legitimately moved into an expansion phase.
Motilal Oswal has consequently upped its target prices for the top PSU bank picks ranging from 17-74%. State Bank of India saw its target rise to Rs. 800 from Rs. 700 previously. Bank of Baroda is now eyed at Rs. 280 compared to Rs. 240 earlier while Canara Bank moved to Rs. 550 from Rs. 440.
Valuations also still look reasonable to the brokerage relative to improved earnings outlook and growth potential. Even after doubling and tripling in value over the last few years, most PSU bank stocks are reasonably priced around 2-3x estimated FY24 book value.
As a result, Motilal Oswal retains an overall bullish view on the sector. Strengthening fundamentals and supportive government policies are driving a gradual but meaningful re-rating of these names. With loan books expected to grow at double digits and asset quality continually enhancing, steady profit gains seem assured in the coming years.
For investors with a long-term view, PSU stocks appear poised for further outperformance as the re-rating story plays out. Backed by robust fundamentals and reasonable valuations, leading names in the space like SBI, BoB and Canara Bank continue presenting multi-year upside from present levels according to Motilal Oswal’s analysis.
