'Top PSBs on track to normalise earnings by FY25'

Mumbai: Public sector banks (PSBs) are on track to complete earnings normalisation, aided by lower credit costs, improved loan growth and net interest margins (NIMs), Motlial Oswal said in a report. The brokerage expects average credit cost of the top s0even PSBs to moderate to 1.2% by the financial year ended March 2025 from 3.3% over FY18-21.

"Overall, we forecast top seven PSBs under our coverage to report a profit after tax of ₹1.3 lakh crore in FY25 versus a loss of ₹59,400 crore in FY18. Thus, we expect 29% earnings compounded annual growth over FY22-25 and estimate these PSBs' RoA/RoE to improve to 0.9%/14.2% in FY25, respectively," the brokerage said in a report.

PSBs' return on assets (RoAs) was at 0.20% while return on equity was at 2.60% in the financial year 2020.

The brokerage resumed coverage on PSBs in early FY22, enthused by their improving business/earnings outlook.

"We continue to believe that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of the stocks. We note that while the improvement in RoE has been encouraging, a sharp moderation in net non-performing asset ratio has resulted in a much higher increase in adjusted book value (ABVs). Thus, ABV for top seven PSBs is likely to grow at a 12-23% range over FY22-25E v/s 14-19% for top private banks. Valuations thus appear attractive considering the growth/profitability outlook," the brokerage said. It listed State Bank of India (SBI), Bank of Baroda (BOB) and Canara Bank as its top picks.

The report noted that SBI reported RoA of around 1% over financial year 2005 to financial year 2010 and has crossed the 1% RoA mark excluding treasury income so far in the first half this year.