SBI top pick as PSU banks narrow gap with private banks: Jefferies

Pointing out how PSU banks are bridging the gap with private ones on growth and return on assets (ROA), global brokerage firm Jefferies said the valuations of PSU banks are at a 70% discount to private banks and can narrow further to 50%. The State Bank of India (SBI) is its top pick in the PSU bank space.

"As the gap in growth and profitability narrows over next 12-18 months, we see headroom for PSU banks to close the gap on valuations with private banks further and believe a valuation gap of around 0.50% is more sustainable," Jefferies said in a note.

On SBI, it has a buy rating with a target price of Rs 760, signaling an upside potential of about 26%. For Punjab National Bank (PNB), the brokerage sees a downside potential of around 48%.
Among private lenders, Jefferies has buy ratings on ICICI Bank, Axis Bank, Kotak Mahindra Bank, IndusInd Bank, and Bandhan Bank.

PSU banks have seen rerating in recent months with some of them even giving multibagger returns. The Nifty PSU Bank index itself is up over 70% so far in the calendar year 2022.

"PSU Banks have become more active lenders with their credit growth improving to 15% YoY as of September 2022, the highest since 2013. The gap in growth versus the private banks has also narrowed to just 5ppt in September 2022 vs 24% at the peak in March 2019 and pre-Covid 3-year average gap of 17ppt," Jefferies analysts Prakhar Sharma and Vinayak Agarwal said.

With the bulk of corporate stress loans already accounted for and limited incremental lending over the past 3 years, PSU banks' default rates have also narrowed to 1.6% levels of past-year loans in 2QFY23.

"We believe that even as credit costs normalise up a little from current levels, they will remain low for FY24 offering headroom for PSU banks to deliver 0.8-1% ROA in FY24," the analysts said, adding that the growing gap between PSU banks and private banks are seen as being in a narrower range over the next 12-18 months.

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