PSU Banks: opportunity beckons - HDFC Securities

HDFC Securities has released a research report on PSU Banks. It remains cautious on the macro environment and expect asset quality deterioration to continue. However, the imminent fall in interest rates (our est is ~100bps over the next 12 months) will boost bank valuations.

The CNX Bank Nifty has out-performed broader indices, and delivered 37% return vs. Nifty's 20% YTD in 2012. On a broader basis, PSBs (ex OBC) have under-performed with returns in range of 2% to 31%, while most of the Private Banks have outperformed with returns of 35% to 50%.

However, on 6M basis, PSBs have underperformed both the CNX Bank Nifty and its pvt peers. PSBs have fallen 3% to 24%, while the pvt banks have delivered return of -12% to +12%. Despite the recent run-up, PSB stocks are trading close to historic low valuations (0.7x - 1.2x) with RoEs of ~15%-19%. Further, some PSBs also offer the comfort of decent dividend yield ~4%.

Top Picks

- State Bank of India (SBIN) is one of the best plays on the Indian economy amongst banks. As the largest lender, SBIN continues to face macro headwinds. However, we believe its sustainably higher NIMs provide a cushion for credit costs. This is relevant in view of SBI's visibly conservative early NPA recognition (vs. restructuring by peer PSBs). SBIN can report ~20% profit CAGR over the next two years. SBI trades at 1.2xFY14E ABV (adj for sub). Maintain BUY, SOTP = Rs 2,353/sh (11% upside).

- Canara Bank's (CBK) renewed strategy to de-bulk its balance sheet augurs well. Weak liability franchise (23% CASA), higher exposure to stressed sectors (infra 18%), corporate heavy loan book (62% of advances), higher credit cost and management change in Sep-12 remain key overhangs. CRAR at 13.2% with Tier I at 10% is a positive. Upgrade to BUY from Outperform, TP Rs 483/sh (based on 0.95x FY14e ABV).

- Oriental Bank of Commerce's (OBC) management has outlined a strategy to change business model by de-bulking its balance sheet and improving business parameters. OBC has remained on a weak footing with lower CASA, higher impaired assets and lower return ratios. While the current valuations factor in most of the negatives, the management change and a new-found focus on addressing the bank's weaknesses offer upsides. At 0.7x FY14E ABV, we see value. Maintain BUY, TP Rs 347 (22% upside, 0.9x FY14e ABV).

Source : Equity Bulls

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