Motilal Oswal picks 3 PSU bank stocks as valuations remain inexpensive

Improved earnings quality and inexpensive valuation of PSU banks have prompted domestic brokerage Motilal Oswal to narrow down to

State Bank of India (SBI), Bank of Baroda (BoB) and Canara Bank as top stock picks.

"Public Sector Banks (PSBs) have come a long way over the past five years with profitability of top 7 PSBs under our coverage improving to an estimated Rs 909 billion in FY23 from a loss of Rs 594 billion in FY18. We estimate earnings traction to sustain aided by improved loan growth, margins and controlled credit costs," the brokerage said.

"While the RoA mark of around 1% for a PSB appeared more like an aspiration until two years ago, we note that collectively the top seven PSBs under our coverage have delivered an average RoA of 1.1% over 10 years during FY04-13. Even the peak RoA witnessed over this decade across these PSBs stood healthy at 1.1%-1.7%," it added.

Motilal estimates the top seven PSBs to report a PAT of Rs 1.3 lakh crore in FY25 against a loss of Rs 59,400 crore in FY18 thereby driving FY25E RoA/RoE to 0.9%/14.2%, respectively. ABV for these PSB's is likely to grow higher in the 12-23% range over FY22-25E v/s 14-19% for top private banks, it said.

The brokerage is of the opinion that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks.

Motilal Oswal's top 3 PSU bank stock picks:

State Bank of India (SBI)
Motilal Oswal has a ‘buy’ recommendation on SBI with a target price of Rs 735, which signals an upside potential of 22% from the current market price of Rs 603 per share.

Bank of Baroda
Motilal Oswal has a ‘buy’ call on Bank of Baroda with a target price of Rs 240, which shows an upside potential of 29% from the current market price of Rs 186 per share.

Canara Bank
The brokerage firm has a ‘buy’ rating on Canara Bank with a target price of Rs 410, implying an upside potential of 27% from the current market price of Rs 323 per share.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)