Sector Update | 26 February 2024

Financials

PSBs: Sustained profitability to drive stock performance

Re-rating has been sharp but valuations still reasonable; Maintain OW











PSBs’ market cap contribution in

total banking sector has increased

to FY14 levels

Share in MCap (%)

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Feb'24

PSBs Pvt Banks

37

33

30

25

27

21

21

19

21

25

27

35

63

67

70

75

73

79

79

81

79

75

73

65

30,458





We resumed coverage on all six PSU Banks in early 2021, and followed this up with

upgrading BOB at INR81 in Aug-21, after being NEUTRAL for four years. We have since

published two PSU bank sector notes; 1.

PSBs: The Homecoming of RoA in Jan-23

and

followed this with a second report titled 2.

PSBs: Well poised for Re-rating 2.0 in

Dec’23.

While PSU Banks have delivered a significant outperformance over the past three

years and the sector has seen a significant re-rating, the stock valuations still look

reasonable in context to business growth and profitability (~18-19% RoE over FY24-

26E).

The combined profitability of six PSBs under our coverage will surpass ~INR1t in

FY24E. We estimate aggregate earnings of our PSB coverage to register a CAGR of 21%

over FY24-26E (boosted by PNB & SBI), thereby reaching INR1.7t by FY26E.

We believe that while NIMs may remain range-bound with a slight downward bias,

the improvement in opex ratios, scope for further credit cost reduction (barring SBI),

and a healthy treasury performance will enable the sector RoA to reach ~1.2% by

FY26E.

Considering PSBs’ valuation history, their trading multiples may look constrained now;

however, the quality of earnings, growth outlook, and broader re-rating in Public

Sector enterprises will enable steady performance for the sector.

Several PSBs have raised capital from the market, which should aid business growth,

particularly as the capex cycle revives post general elections. We believe that

sustained and consistent performance on return ratios and a conducive macro-

environment can drive further re-rating of the sector.

We maintain our OW stance on the sector and roll forward our PTs to FY26. Top picks:

SBIN & UNBK.

PSBs’ market cap has grown at an accelerated pace

The market cap of PSBs has grown at a robust pace in recent years, up ~5x since

FY20 at ~INR17t. Recent capital raises and prior recapitalization support by the

government have strengthened PSBs’ capital adequacy ratios, enabling them to

deliver healthy loan growth and cleanse their balance sheets. The aggregate market

cap of PSBs has increased from ~INR5.3t in Mar’21 to ~INR17t in Feb’24. Meanwhile,

the market cap of private banks over the similar period has grown just 43% to

~INR30.4t in Feb’24 (despite HDFC-HDFC Bank merger).

Total Mcap (INR b) 16,573

Rating

SBI

BOB

INBK

UNBK

CBK

PNB

Buy

Buy

Buy

Buy

Buy

Neutral

Old PT

(INR)

860

290

525

165

570

100

PSBs have seen a remarkable turnaround, from record losses to record profits, as

their aggregate earnings crossed the ~INR1t mark in FY24. The strong earnings

New PT

recovery is attributed to steady credit growth, significant improvements in asset

(INR)

quality, and stable to positive margins. We note that PSBs reported higher earnings

860

in FY23-FY24 than in the past one decade. PSBs’ earnings contribution to total

310

banking sector earnings has increased to FY15 levels, even as their loan market

600

share has declined by ~20% since then. We estimate the profitability of the top six

175

PSBs under our coverage to improve to INR1.74t by FY26, nearly doubling over FY23

650

levels. We estimate that the aggregate earnings share of PSBs in total banking sector

115

earnings will remain resilient at ~48% over FY25-26.

PSBs’ [FY23 + FY24 PAT] >> Sum of PAT of previous decade

Nitin Aggarwal - Research Analyst

(Nitin.Aggarwal@MotilalOswal.com)I

Research Analyst: Dixit Sankharva

(Dixit.sankharva@MotilalOswal.com)

|

Disha Singhal

(Disha.Singhal@MotilalOswal.com)

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Financials

PSBs’ PAT contribution in total

Market share erosion to private banks narrows sharply

Banking sector PAT has increased

PSBs’ market share (both in deposits and advances) has declined consistently over

to FY15 levels even as loan market

the past years. However, the pace of market share erosion in loans to the private

share has declined sharply

Banking sector

earnings mix (%)

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

Earnings in

FY24E (INR b)

Pvt Banks PSBs

52%

NA

99%

NA

NA

NA

69%

59%

54%

53%

52%

52%

1,539

48%

NA

1%

NA

NA

NA

31%

41%

46%

47%

48%

48%

1,360

sector has moderated significantly over the recent years. We note that in the past

three years, PSBs lost market share of ~300bp in loans vs. 600-800bp average loss in

the preceding three-year blocks. Recent fund raises and notable enhancements in

the balance sheet strength have contributed to healthy loan growth in recent years.

In FY23, PSBs clocked a loan growth rate of ~17%, which is comparable to the 18%

growth rate achieved by private banks during the same period. Given a low credit-

deposit (CD) ratio and ample balance sheet liquidity, we expect PSBs’ credit growth

to remain healthy over FY24-26E.

PSBs NNPA ratio to be broadly similar to private banks by FY24 end

PSBs have delivered a notable reduction in gross NPAs, from the peak of 14.6% in

Mar’18 to 3.7% in FY24E. Their PCR is estimated to improve to 78% in FY24E from

48% in FY18. With asset quality stress largely behind, we expect asset quality ratios

to improve further, with the NNPA ratio becoming broadly comparable to private

banks by FY24 end. This will keep credit costs under control and support overall

profitability. We note that while the NNPA ratio for PSBs and private banks will

become comparable, PSBs still have a higher GNPA ratio and a much bigger Total

Written-off (TWO) pool, which will enable them to benefit from continued

recoveries and report healthy earnings. Controlled SMA book and healthy upgrades

will enable continued improvement in asset quality and drive a further reduction in

credit costs for several PSBs.

Liquidity situation comfortable; benign CD ratio to aid growth

PSBs maintain a controlled CD ratio, which indicates ample liquidity amid systemic

pressures, even as private banks are grappling with a historically high CD ratio. SBIN,

the largest PSB, has a domestic CD ratio of ~66%, while PNB is also well positioned

with a CD ratio of 69%. Barring BOB, all other PSBs in our coverage have fairly

comfortable CD ratios. A high CD ratio may constrain loan growth for select private

banks, while PSBs will likely remain insulated. We thus expect the credit growth

differential between private banks and PSBs to narrow over FY24-25, as high

regulatory oversight on the CD ratio may compel some banks to moderate loan

growth. PSBs’ LCR ratio also remains well above the regulatory requirement of 100%

(125%-150%), providing them with adequate cushion to deliver sustainable growth.

ABV growth for PSBs has accelerated in past three years; estimate 18%

CAGR in ABV over FY24-26

PSBs have demonstrated a remarkable outperformance in recent years, driven by a

strong earnings turnaround, robust balance sheets, and attractive valuations.

Notably, since Mar’22, the Nifty PSU Bank index has surged 162% compared to 24%

returns for the Nifty Private Bank index. We note that PSBs have delivered robust

ABV growth of 20% over FY21-24, surpassing the average ABV growth of 15-16% by

private banks during the same period. The ongoing asset quality improvement,

enabling further moderation in credit costs (barring SBIN) should help PSBs sustain a

higher ABV growth rate compared to private banks. We, thus, estimate average ABV

growth for PSBs over FY24-26 to sustain at 18% vs. 16% for private banks.

26 February 2024

2

Financials

Earnings on a roll – Revisiting Bull, Bear case scenarios

PSBs have witnessed a remarkable resurgence in recent years, marked by a strong

earnings turnaround, robust balance sheets, and attractive valuations. Profitability

for PSBs crossed the ~INR1t mark in FY24, attributed to significant improvements in

asset quality, healthy credit growth, and steady margins. Asset quality of PSBs has

seen notable improvements, with the NNPA ratio set to become broadly

comparable to that of private banks by FY24 end. PSBs are well positioned to sustain

1% RoA, which was previously seen as an aspirational target. We have attempted a

scenario analysis for earnings of our six PSB stocks in both Bull and Bear cases. In our

Bull case, FY25E/FY26E PAT will grow by up to 15%/18% for BOB, 17%/17% for CBK,

21%/20% for Indian Bank (INBK), 29%/19% for Punjab National Bank (PNB),

13%/12% for SBIN, and 17%/16% for Union Bank of India (UNBK), and their ABV will

see upside of 3%-4%. Please refer to page 23 for details.

Valuation and view

PSBs have made a sharp comeback in recent years, with the Nifty PSU Bank Index

alone delivering 162% returns since Mar’22, overshadowing the 24% returns of the

Nifty Private Bank index over the same period. We estimate the top six PSBs under

our coverage to report a PAT of INR1.5t/INR1.7tn in FY25/FY26, while the sector’s

RoA/RoE are expected to improve to 1.2%/17.9% by FY26E.



We believe that while the PSU rally has been sharp and the sector has seen

significant re-rating, the stock valuations still look reasonable in context to

business growth and profitability (~18-19% RoE over FY24-26E).



Considering PSBs’ valuation history, their trading multiples may look constrained

now; however, the quality of earnings, growth outlook, and broader re-rating in

Public Sector enterprises will enable steady performance for the sector.



PSU Banks are well positioned to pursue healthy growth (given ample balance

sheet liquidity) and maintain resilient margins as they benefit from residual

MCLR repricing. The decline in bond-yields, along with continued improvement

in credit cost (barring SBI), will support healthy profitability.



Several PSBs have raised capital from the market and are thus well poised to

benefit from any revival in corporate demand, particularly as the capex cycle

recovers after the general elections. We estimate ABV for our coverage PSBs to

register a healthy CAGR of ~18% over FY24-26.



We believe that sustained and consistent performance on return ratios and a

conducive macro-environment can drive further re-rating of the sector.

We

maintain our OW stance and roll forward our PTs to FY26. Top picks: SBIN &

UNBK.

Exhibit 1:

Valuation summary of PSU Banks

SBIN*

PNB

BOB

CBK

UNBK

INBK

Rating

FY26E

Buy

Neutral

Buy

Buy

Buy

Buy

CMP

(INR)

759

128

269

580

146

525

MCap

(INR b)

6,836

1,420

1,427

1,056

1,006

657

TP Upside Mcap

EPS (INR)

RoA (%)

(INR) (%) (USDb) FY25E FY26E FY25E FY26E

860

13

82.4

81.4

93.9 1.1

1.2

115

-10

17.1

10.5

14.0 0.7

0.9

310

15

17.2

39.8

45.7 1.2

1.2

650

12

12.7

94.5 111.1 1.1

1.2

175

20

12.1

22.6

26.7 1.1

1.2

600

14

7.9

70.6

83.1 1.2

1.2

RoE (%)

P/E (x)

P/BV (x)

P/ABV (x)

FY25E FY26E FY25E FY26E FY25E FY26E FY25E FY26E

19.5 19.1 6.3

5.5

1.1

0.9

1.2

1.0

11.0 13.1 12.1 9.2

1.2

1.1

1.3

1.2

17.8 17.6 6.8

5.9

1.1

0.9

1.2

1.0

19.5 19.1 6.1

5.2

1.1

0.9

1.2

1.0

17.6 18.0 6.5

5.5

1.0

0.9

1.1

0.9

16.7 17.0 7.4

6.3

1.1

1.0

1.1

1.0

26 February 2024

3

Financials

PSBs’ market cap has grown at an accelerated pace

Aggregate PSB market cap increased to ~INR16t in Feb’24 (INR3t in Mar’20)







The aggregate market cap of PSBs has increased at a robust pace over the years,

up ~5x since FY20 at ~INR17t. Recent capital raises and prior recapitalization

support by the government have strengthened PSBs’ capital adequacy ratios,

enabling them to deliver healthy loan growth and cleanse their balance sheets.

This has enabled PSBs to deliver robust earnings traction, which has reflected in

a strong outperformance of the sector. The aggregate market cap of PSBs has

increased from ~INR5.3t in Mar’21 to ~INR17t in Feb’24.

Notably, the market cap of private banks over the similar period has grown at a

slower pace, from ~INR21t in Mar’21 to ~INR30.4t in Feb’24 (despite HDFC-

HDFC Bank merger).

Exhibit 2:

Listed BFSI sector market cap stands at ~INR86t (22% of overall market) with the

banking sector accounting for 55% of total BFSI sector market cap

M.Cap share in BFSI sector

Insurance, 14%

Capital market, 1%

PSU Banks, 20%

NBFC, 30%

Private Banks,

35%

Source: MOFSL, Company

Exhibit 3:

PSBs’ market cap contribution

in total banking sector has increased to FY14 levels

Market Cap (INR b)

PSBs

Pvt Banks

Total

Share in M. Cap

PSBs

Pvt Banks

Total

FY13

2,672

4,540

7,212

37%

63%

100%

FY14

2,671

5,333

8,004

33%

67%

100%

FY15

3,392

8,029

11,421

30%

70%

100%

FY16

2,611

7,910

10,521

25%

75%

100%

FY17

3,996

10,622

14,617

27%

73%

100%

FY18

3,521

13,581

17,102

21%

79%

100%

FY19

4,720

17,429

22,149

21%

79%

100%

FY20

2,918

12,070

14,988

19%

81%

100%

FY21

5,511

21,354

26,864

21%

79%

100%

FY22

7,457

22,305

29,763

FY23

9,227

24,851

34,078

Feb'24

16,573

30,458

47,030

25%

27%

35%

75%

73%

65%

100%

100%

100%

Source: MOFSL, Company

26 February 2024

4

Financials

Exhibit 4:

PSU Bank index has given 91% return in FY24YTD (Apr’23- Feb’24) vs. 14% for

Private Bank index over the similar period

Nifty PSU Bank

Nifty Private Banks

91%

36%

23%

2%

FY22

FY23

12%

14%

Apr'23-Feb'24

Source: MOFSL, Company

Exhibit 5:

Aggregate market cap of PSBs has increased to ~INR17t vs. INR3t in FY20

M.Cap

(INRb)

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Feb'24

SBI

1,391

1,432

1,994

1,508

2,339

2,157

2,863

1,757

3,251

4,405

4,674

6,735

PNB

254

269

261

166

319

231

363

218

384

386

513

1,433

BOB

285

310

351

339

399

328

340

247

383

577

873

1,425

IOB

52

63

52

52

65

50

93

116

263

343

424

1,291

UNBK

120

87

99

90

107

80

112

98

218

265

455

1,073

CBK

170

122

170

103

164

158

219

93

251

413

516

1,063

INBK

76

53

81

50

134

144

135

26

131

192

359

697

BOI

180

147

126

79

147

123

288

106

222

188

306

656

Central

Bank

49

67

160

123

201

142

120

70

96

159

209

578

PSB

15

12

18

14

22

14

18

8

12

63

174

458

BOM

Others

Total

30

50

2,672

33

76

2,671

39

40

3,392

34

53

2,611

39

59

3,996

19

75

3,521

36

134

4,720

52

127

2,918

136

163

5,511

112

354

7,457

167

556

9,227

439

725

16,573

Source: MOFSL, Company

Exhibit 6:

Private banks’ aggregate market cap has increased to INR30.5t (43% returns since Mar’21 – despite HDFC merger)

M.Cap

(INRb)

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Feb'24

HDFCB

1,488

1,796

2,563

2,708

3,697

4,895

6,315

4,726

8,234

8,154

8,981

10,785

ICICI

Bank

1,206

1,438

1,829

1,376

1,612

1,789

2,582

2,095

4,026

5,072

6,126

7,181

KMB

487

602

1,014

1,248

1,605

1,997

2,546

2,479

3,474

3,480

3,442

3,449

AXSB

IIB

Yes

IDFCFB

Bank

154

149

341

364

655

702

637

282

391

308

433

817

FB

82

82

113

80

158

176

191

82

151

205

280

401

AUSFB BANDHAN RBL

KVB EQUITAS UJJIVAN CUBK Others Total

48

40

66

53

68

73

57

16

44

37

83

151

27

29

58

57

91

115

150

95

115

95

93

104

229

247

249

227

321

348

522

283

568

591

690

1,422

4,540

5,333

8,029

7,910

10,622

13,581

17,429

12,070

21,354

22,305

24,851

30,458

608

212

686

264

1,328 469

1,058 576

1,175 852

1,310 1,078

1,999 1,073

1,069 244

2,137 723

2,336 725

2,641 829

3,297 1,162

164

202

161

265

101

316

247

344

586

177

174

154

383

392

386

389

559

628

328

546

495

315

323

186

201

290

69

124

78

85

159

69

64

75

122

47

53

26

49

110

Source: MOFSL, Company

26 February 2024

5

Financials

PSBs’ [FY23 + FY24 PAT] >> Sum of PAT of previous

decade

Earnings mix has risen to FY14 levels, despite erosion in loan market share









PSBs have reported a sharp turnaround in earnings with sector profitability

crossing the ~INR1t mark in FY24. The doom-to-bloom story of PSBs is attributed

to significant improvement in asset quality, healthy credit growth in recent

years, and steady margins. This together helped PSBs deliver robust earnings

performance over the past few years.

We thus note that the aggregate PSB earnings over the two years (FY23 & FY24)

are more than what they made in the past one decade.

PSBs’ share in the total banking sector earnings has thus increased from

negligible levels in FY16-20 to ~47% in FY24. This is comparable to the earnings

share that PSBs had in FY15; however, the loan market share back then stood at

77% vs. 59% currently.

We estimate that the profitability of the top six PSBs under our coverage should

rise to INR1.74t by FY26, nearly doubling from FY23 levels. We estimate aggregate

PSB’s earnings share to remain resilient at ~48% over FY25/FY26.

Exhibit 7:

PSBs to report ~25% earnings CAGR over FY23-26E

Earnings for PSBs have

improved significantly to

INR855b in 9MFY24 vs.

INR110b in FY20

336

268

283

(2)

40

(295) (110)

Top 6 PSB's Earnings (INRb)

1,483

1,740

912

110

317

573

1,186

855

Calculated based on six PSBs under our coverage Source: MOFSL, Company

Exhibit 8:

Aggregate earnings trends in PSBs and Private Banks

Earnings (INR b)

Private banks

PSU banks

System Profitability

FY13

275

469

744

FY14

324

342

666

FY15

374

343

717

FY16

406

(196)

210

FY17

414

5

419

FY18

413

(854)

(441)

FY19

422

(817)

(396)

FY20

191

(260)

(69)

FY21

695

318

1,013

FY22

962

665

1,628

FY23

1,241

1,046

2,288

FY24E

1,539

1,360

2,900

FY25E

1,832

1,700

3,532

FY26E

2,179

1,990

4,169

Exhibit 9:

PSBs’ PAT contribution in

total Banking sector PAT has increased to FY15 levels…

Market Share in PAT (%)

Private banks

PSU banks

Total

FY13

37%

63%

100%

FY14

49%

51%

100%

FY15

52%

48%

100%

FY16

NA

NA

NA

FY17

99%

1%

100%

FY18

NA

NA

NA

FY19

NA

NA

NA

FY20

NA

NA

NA

FY21

69%

31%

100%

FY22

59%

41%

100%

FY23 FY24E FY25E FY26E

54%

53%

52%

52%

46%

47%

48%

48%

100% 100% 100% 100%

26 February 2024

6

Financials

Exhibit 10: …even as loan market share has declined sharply

Market Share in Advances (%)

PSBs

Pvt Banks

Total

FY13

79%

21%

100%

FY14

79%

21%

100%

FY15

77%

23%

100%

FY16

74%

26%

100%

FY17

71%

29%

100%

FY18

68%

32%

100%

FY19

64%

36%

100%

FY20

63%

37%

100%

FY21

61%

39%

100%

FY22

60%

40%

FY23 1HFY24

59%

41%

58%

42%

100% 100% 100%

Source: MOFSL, Company

Exhibit 11:

Market cap of PSBs has increased by 200% from Mar’21 to Feb’24 vs. 43%

growth in private banks

3 yr M.Cap growth

200%

43%

Private Banks

PSBs

Source: MOFSL, Company

26 February 2024

7

Financials

Market share loss to private banks has narrowed sharply

Estimate PSBs loan growth at ~13% over FY25-26E







The market share for PSBs (both in deposits and advances) has declined

consistently over the past years. We thus note that as of Sep’23, the deposit

market share of PSBs declined to 64%, while the loan market share declined to

~58%.

However, the pace of market share erosion in loans to the private sector has

moderated significantly over the recent years. We note that over past three

years, PSBs lost market share of ~300bp in loans vs. 600-800bp average in the

preceding three-year blocks.

Further, backed by recent fund raises and significant improvement in balance

sheets, PSBs have delivered healthy loan growth in recent years. During FY23,

PSBs’ loan growth stood at ~17% vs. 18% for private banks. Given a low CD ratio

and ample balance sheet liquidity, we expect PSBs’ credit growth to remain

healthy over FY24-26E.

Exhibit 12:

Deposit market share of PSBs has moderated to 64% in Sep’23

PSBs

Pvt Banks

Source: MOFSL, Company

Exhibit 13:

Advances market share has declined more sharply to ~58% in Sep’24

PSBs

Pvt Banks

1HFY24 is adjusted for HDFC Ltd credit

Source: MOFSL, Company

26 February 2024

8

Financials

Exhibit 14:

Loan growth has seen a healthy traction for PSBs over the past few years

Private Banks

PSBs

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24E*

FY25E*

FY26E*

*Adjusted for HDFC Ltd credit; In FY21, PSBs has 22% growth due to merger; Data above are for MOSL

coverage universe

Source: MOFSL, Company

Exhibit 15:

PSBs: Pace of market share loss in advances has moderated significantly

PSBs’ advances market

share loss to private banks

declined to 3% during FY21-

24 vs. 8% loss during FY17-

20

6%

Advances Market share loss of PSBs

8%

3%

FY17-20

FY21-24

Source: MOFSL, Company

FY13-16

26 February 2024

9

Financials

PSBs’ weight in Nifty-50 has increased over recent years

Increase in free float and continued performance to drive further increase











BFSI accounts for nearly one-third of the Nifty-50 benchmark index. While the

aggregate weight of BFSI in the benchmark has declined over the recent years,

the weight of the banking sector has steadily increased to 28.4%.

Incidentally, the trend in banking sector earnings to total Nifty earnings has also

increased significantly over the past few years, and during FY23, the sector

earnings accounted for ~28.3% of total Nifty earnings.

PSBs’ weight in the Nifty-50 index has declined from 4.1% in FY13 to 3.1% in

Feb’24, though it has increased by ~100bp since Mar’20 levels.

We note that the earnings contribution of PSBs to total Nifty earnings has been

healthy, increasing from 0.7% in FY19 to ~8.3% in FY24. In comparison, the

earnings of private banks in the Nifty improved from 11.4% in FY19 to 19.9% in

FY24.

The improved operating performance has helped PSBs to not just shore up

capital by accessing public markets, but also helped most banks see huge

demand in their recent QIPs, consequently reducing government shareholding.

As a result, their free float market capitalization has increased, which will lead to

an increase PSBs’ weight within the Nifty.

Exhibit 16:

BFSI accounts for nearly one-third of total Nifty-50; Banking sector weight has risen to 28.4% in Feb’24

Sector

Automobiles

BFSI

Banks

Private

Axis Bank

HDFC Bank

ICICI Bank

IndusInd Bank

Kotak Mah. Bank

Yes Bank

Public

Bank of Baroda

PNB

St Bank

Insurance

NBFC

Capital Goods

Cement

Consumer

Healthcare

Infrastructure

Media

Metals

Oil & Gas

Real Estate

Technology

Telecom

Utilities

Miscellaneous

Nifty-50

Mar'13

7.9

28.5

20.6

16.5

2.3

6.3

6.6

1.4

4.1

0.6

0.5

2.9

0.0

8.0

5.1

3.3

13.1

5.2

0.4

0.0

2.9

12.2

0.5

14.5

1.9

4.6

0.0

100.0

Mar'14

8.8

27.4

20.6

16.9

2.0

6.2

6.4

1.0

1.3

3.7

0.6

0.5

2.6

0.0

6.8

5.3

3.1

12.6

5.2

0.0

0.0

4.0

11.5

0.4

16.3

1.7

3.6

0.0

100.0

Mar'15

8.9

31.8

24.0

20.3

3.2

6.7

6.2

1.3

1.9

0.9

3.7

0.5

0.4

2.8

0.0

7.8

5.5

2.9

9.5

7.0

0.0

0.6

2.3

8.2

0.0

16.5

2.5

4.2

0.0

100.0

Mar'16

9.7

29.7

23.4

20.5

2.7

7.6

5.0

1.7

2.5

1.0

2.9

0.5

0.2

2.2

0.0

6.3

4.0

3.2

10.3

6.8

0.8

0.8

1.5

9.4

0.0

17.6

2.2

4.0

0.0

100.0

Mar'17

11.0

33.4

25.5

22.3

2.4

8.5

4.7

2.1

3.0

1.5

3.2

0.5

2.7

0.0

7.9

3.8

3.1

10.3

5.6

0.8

0.9

1.7

10.8

0.0

13.0

1.8

4.1

0.0

100.0

Mar'18

9.9

35.8

26.3

23.9

2.1

9.9

4.6

2.3

3.6

1.4

2.4

Mar'19

6.1

38.8

28.8

26.3

3.2

10.7

5.5

1.9

3.8

1.1

2.6

Mar'20

4.5

36.5

26.2

24.1

2.4

10.4

5.9

0.6

4.8

2.1

Mar'21

5.4

38.0

26.4

24.2

2.8

10.2

6.3

0.8

4.0

2.2

Mar'22

4.8

35.2

24.3

21.9

2.6

8.4

6.6

0.8

3.4

2.5

Mar'23

5.3

37.7

27.3

24.7

3.1

9.3

8.0

0.9

3.3

2.6

Feb'24

7.1

32.5

28.4

25.3

3.1

11.1

7.4

1.0

2.7

3.1

2.4

0.0

9.6

4.1

1.5

9.3

3.6

0.7

0.8

3.3

12.2

0.0

12.7

2.0

3.4

0.7

100.0

2.6

0.0

10.0

3.7

1.6

11.3

2.4

0.6

0.5

2.8

13.2

0.0

13.7

1.5

3.0

0.8

100.0

2.1

0.0

10.3

2.8

2.2

14.5

2.7

0.5

0.3

1.7

12.4

0.0

15.0

3.1

3.1

0.5

100.0

2.2

1.4

10.2

2.7

2.7

11.5

3.3

0.8

0.0

2.4

11.8

0.0

16.8

2.0

2.1

0.6

100.0

2.5

2.6

3.1

1.3

1.3

1.3

9.5

9.1

2.8

2.8

3.4

4.1

2.2

1.9

2.0

10.4

12.6

11.2

4.0

3.8

4.5

0.7

0.6

1.0

0.0

0.0

0.0

3.4

2.7

2.8

13.1

11.5

12.2

0.0

0.0

0.0

18.2

14.1

14.6

2.3

2.4

3.0

2.3

2.7

4.2

0.6

1.1

1.1

100.0

100.0

100.0

Source: MOFSL, Company

26 February 2024

10

Financials

Exhibit 17:

PSU Banks

weights

have increased in Nifty bank in past few years

Bank

AUBANK

AXISBANK

BANDHANBNK

BANKBARODA

FEDERALBNK

HDFCBANK

ICICIBANK

IDFCFIRSTB

INDUSINDBK

KOTAKBANK

PNB

SBIN

Nifty Bank weight

Mar'22

2.4

11.6

1.8

1.8

1.7

28.5

22.4

1.1

5.3

11.4

0.9

11.1

100.0

Mar'23

2.5

10.1

1.3

2.8

2.5

27.8

24.0

1.5

6.2

10.0

1.2

10.1

100.0

Feb'24

1.8

10.1

1.0

3.1

2.1

25.2

24.8

2.0

6.1

9.2

2.4

12.0

100.0

Source: MOFSL, Company

Exhibit 18:

Mix of Banking sector earnings to total Nifty earnings has increased to 28.3% vs

9.8% in FY18

Banking sector weight in

Nifty stood at 28.4% in

Feb’24 vs 20.6% in FY14

18.9

Banking sector weight in Nifty (%)

Banking sector earnings to Nifty (%)

28.3

19.8

19.9

12.5

9.8

26.3

FY18

12.1

21.7

22.2

28.3

17.1

17.3

20.6

FY13

20.6

FY14

24.0

FY15

23.4

FY16

25.5

FY17

28.8

FY19

26.2

FY20

26.4

FY21

24.3

FY22

27.3

FY23

28.4

Feb'24

Exhibit 19:

PSU Banks earnings to total Nifty earnings have recovered to decadal highs

PSU Bank weight in Nifty

have increased in recent

years to 3.1%; however, it

still remains lower than

their weight during FY13-15

8.1

5.6

PSU Bank weight in Nifty (%)

6.6

4.4

0.1

0.7

-1.5

8.9

PSU Bank earnings to Nifty (%) 8.3

5.7

5.5

6.3

4.1

FY13

3.7

FY14

3.7

FY15

2.9

FY16

3.2

FY17

2.4

FY18

2.6

FY19

2.1

FY20

2.2

FY21

2.5

FY22

2.6

3.1

FY23 Feb'24

26 February 2024

11

Financials

Exhibit 20:

Private Banks earnings to Nifty earnings has increased to 19.9%

Pvt Bank weight in Nifty (%)

Pvt Bank earnings to Nifty (%)

19.3

11.5

13.2

12.9

12.4

14.2

11.3

11.4

16.3

15.9

19.9

10.9

16.5

FY13

16.9

FY14

20.3

FY15

20.5

FY16

22.3

FY17

23.9

FY18

26.3

FY19

24.1

FY20

24.2

FY21

21.9

FY22

24.7

25.3

FY23 Feb'24

Exhibit 21:

Trend in government shareholding across banks (%)

Many PSBs have raised

capital to boost Tier-1 and

reduce government

shareholding

Banks

BOB

BOI

BOM

Canara

CBOI

IOB

Indian

PSB

PNB

SBIN

UCO

Union

Mar'18

64.0

83.1

87.0

72.6

86.4

89.7

81.9

85.6

62.3

58.0

84.2

67.4

Mar'19

63.3

87.1

87.7

70.6

91.2

92.5

81.5

85.6

75.4

57.1

93.3

74.3

Mar'20

71.6

89.1

92.5

78.6

92.4

95.8

83.5

83.1

83.2

56.9

94.4

86.8

Mar'21

64.0

89.1

93.3

69.3

89.8

95.8

88.1

97.1

76.9

56.9

94.4

89.1

Mar'22

64.0

81.4

91.0

62.9

93.1

96.4

79.9

98.3

73.2

56.9

95.4

83.5

Mar'23

Dec'23

64.0

64.0

81.4

73.4

91.0

86.5

62.9

62.9

93.1

93.1

96.4

96.4

79.9

73.8

98.3

98.3

73.2

73.2

56.9

56.9

95.4

95.4

83.5

77.0

Sources: MOFSL, BSE

Exhibit 22:

Value of Government holding has seen ~5x increase since FY20

Value of Govt holding (INR b)

SBIN

PNB

BOB

IOB

UNBK

CBK

INBK

BOI

Central

PSB

BOM

Total

Mar'20

1,000

181

177

111

85

73

22

94

65

6

48

1,863

Value of government

shareholding has seen ~5x

increase from Mar’20 levels to

~INR11t

Feb'24

3,834

1,048

912

1,244

826

669

515

481

538

449

379

10,896

26 February 2024

12

Financials

Asset quality ratios improving steadily

Net NPA ratio for PSU banks and Private banks is comparable









PSU banks have grappled with high NPA levels during the past several years. The

transformative journey that began in 2015 with the asset quality review

exercise, initiated by the RBI, marked a turning point for these institutions.

This led to a rigorous clean-up of bad loans, which along with the subsequent

consolidation that happened in PSBs, has driven a notable reduction in Gross

NPAs to 3.7% in FY24E from the peak of 14.6% in Mar’18. PCR for these banks

has thus improved to 78% in FY24E from 48% in FY18.

With asset quality stress largely behind us, we expect asset quality ratios to

improve further with NNPA ratio likely to decline to 0.6% by FY26E, making it

equivalent to that of the private banks. This will keep credit costs under control

and support the overall profitability.

We note that while the Net NPA ratio for PSU banks and Private banks will become

comparable, PSU banks still have a higher GNPA ratio and a much bigger TWO pool

that will enable them to benefit from the continued recoveries and report healthy

earnings trend.

Exhibit 23:

PSU banks – GNPA ratio is likely to contract to 3.7% in FY24 from the peak of

14.6%

PSU banks’ FY25E GNPA is

likely to be comparable

with their FY15 NNPA

GNPA ratio (%) (PSU Banks)

Source: MOFSL, Company

Exhibit 24:

Private banks – GNPA ratio to contract to 1.9% by FY24E from the peak of 4.8%

GNPA ratio (%) (Pvt Banks)

Source: MOFSL, Company

26 February 2024

13

Financials

Exhibit 25:

PSU banks – Net NPA ratio to contract to 0.8% by FY24E

NNPA ratio of PSU banks to

become broadly

comparable with private

banks by the end of FY24

NNPA ratio (%) (PSU Banks)

Source: MOFSL, Company

Exhibit 26:

Private banks – Net NPA ratio to contract to 0.7% by FY24E

NNPA ratio (%) (Pvt Banks)

Source: MOFSL, Company

Exhibit 27:

PCR ratio of Private banks – 3QFY24

Provision Coverage Ratio (%)

Exhibit 28:

PCR ratio of PSU Banks is similar or higher

Provision Coverage Ratio (%)

81%

78%

81%

73%

71%

IIB

65%

DCB

89%

78%

74%

SBIN

78%

71%

CBK

85%

ICICIBC

AXSB

KMB

HDFCB

INBK

BoB

UNBK

PNB

Source: MOFSL, Company

Source: MOFSL, Company

Exhibit 29:

PCR ratio for PSU banks has improved sharply over the recent years to ~75.5%

in Sep’23

PSBs

Pvt Banks

Sep'19

Mar'20

Sep'20

Mar'21

Sep'21

Mar'22

Sep'22

Mar'23

Sep'23

Source: MOFSL, Company

26 February 2024

14

Financials

Recoveries from the TWO pool sustain a healthy momentum

Low SMA book augurs well for asset quality







The asset quality of PSU banks has improved steadily, supported by healthy

underwriting and continued recovery from the TWO pool. Most of the PSU banks

have reported healthy recoveries from their large written-off asset pool, which

along with controlled slippages, has enabled consistent improvement in asset

quality ratios.

Going forward, several PSBs are guiding a steady recovery from the written-off/

NCLT accounts, thereby leading to low net slippages.

Controlled SMA book and healthy upgrades will enable continued improvement

in asset quality and drive further reduction in credit costs for several PSU banks.

3Q23

0.4

0.4

0.6

0.8

0.2

0.2

0.2

4Q23

0.3

0.4

0.5

0.5

0.1

0.0

0.2

1Q24

0.3

0.4

0.5

0.7

0.2

0.2

0.4

2Q24

0.2

0.3

0.4

0.6

0.2

0.2

0.5

3Q24

0.2

0.3

0.8

0.6

0.2

0.1

0.3

Exhibit 30:

Benign SMA book augurs well for asset quality

SMA 1&2 (% of loans)

BoB

BoI

CBK

INBK

SBIN

PNB*

UNBK

*Only SMA2 is shown for PNB

Source: MOFSL, Company

Exhibit 31:

Trends in restructured portfolio for PSU banks and Private banks

INR b

AXSB

BANDHANN

DCBB

HDFCB

ICICIBC

IIB

KMB

FB

RBK

AUBANK

BOB

SBIN

INBK

PNB

UNBK

CBK

Absolute

(Dec’23)

16.41

NA

11.59

51.287

33.18

15.699

4.59

22

5.037

4.672

99

188.8

94.36

97.2

140.71

NA

Mar’22

0.52

5.2

6.42

1.14

1

2.6

0.44

2.44

3.27

2.5

2.44

1.13

4.73

2.36

2.99

2.77

Mar’23

0.22

NA

4.51

0.31

0.4

0.84

0.22

1.62

1.21

1.2

1.5

0.8

2.51

1.32

2.2

NA

Jun’23

0.21

NA

3.97

NA

NA

0.66

0.19

1.4

1.05

1

1.31

0.69

2.19

NA

2

NA

Sep’23

Dec’23

0.2

0.18

NA

NA

3.4

3

0.22

NA

0.32

0.29

0.54

0.48

0.15

0.13

1.3

1.1

0.89

0.63

0.8

0.7

NA

1

0.62

0.54

2.12

1.93

NA

1.06

1.71

1.57

NA

NA

Source: MOFSL, Company

26 February 2024

15

Financials

Exhibit 32:

Estimated TWO pool as % of net advances of

PSBs as of Dec’23

TWO pool as a % of net advances

Exhibit 33:

Recoveries as a % of TWO pool remain healthy

BOB

CBK

INBK

PNB

SBIN

UNBK

7%

8%

10%

8%

10%

5%

SBIN

PNB

FY22

FY23

9mFY24

Source: MOFSL, Company

BoB

INBK

UNBK

CBK

Source: MOFSL, Company

Slippage ratio has improved

for all PSU banks and fared

better than Private banks

Exhibit 34:

Annualized slippage ratio across PSU banks has improved in 9MFY24

FY23

9mFY24

BOB

CBK

Indian

PNB

SBI

UNBK

Exhibit 35:

Slippage ratio for Private banks is higher than PSU banks

FY23

9mFY24

AXSB

DCB

HDFCB

ICICIBC

IIB

KMB

SMA-2 for PSU banks has

seen a considerable

improvement and is

trending in line with Private

peers over the past two

years

Exhibit 36:

SMA-2 for PSU banks has improved significantly and is trending in line with the

Private peers

2.80

PSBs

Pvt Banks

1.30

1.20

0.30

1.40

0.80

0.50

0.60

1.20

0.20

0.20

0.40

0.40

0.10

0.20

0.40

0.30

0.50

26 February 2024

16

Financials

Liquidity situation comfortable; benign CD ratio to aid growth

LCR too stands at a comfortable ~125%-150%









With the credit-deposit (CD) ratio near its historical peak for several private

banks, the CD ratio for PSU banks remains controlled, implying ample liquidity

on the balance sheet amid systemic liquidity pressures. The LCR ratio for PSU

banks also remains well above the regulatory requirement of 100% (125%-

150%), indicating the comfort they have against their private peers.

The largest PSU bank, SBI, has a domestic CD ratio of ~66%, while PNB is also

well positioned with a CD ratio of 69%. Barring BOB, all other PSU banks within

our coverage have a fairly comfortable CD ratio.

Select private banks have indicated that a high CD ratio may constrain loan

growth for them, even as PSU banks remain broadly insulated from this. We

thus expect the credit growth differential between Private and PSU banks to

narrow over FY24-25.

We believe that while the systemic loan growth may itself be moderate given

the high regulatory oversight of the CD ratio, the Private bank growth estimates

are relatively more at risk than their PSU counterparts.

Exhibit 38:

LCR for Private banks is between 110% and 125%

LCR Ratio (%)

Exhibit 37:

LCR ratio of PSU banks remains comfortable -

3QFY24

LCR Ratio (%)

*LCR ratio as on 2QFY24

Source: MOFSL, Company

*LCR ratio as on 2QFY24

Source: MOFSL, Company

Exhibit 39:

PSU banks – CD ratio remains in control, barring

BOB

CD Ratio (%)

Exhibit 40:

Private banks have much higher CD ratio

CD Ratio (%)

Source: MOFSL, Company

Source: MOFSL, Company

26 February 2024

17

Financials

Exhibit 41:

PSU banks – The 1-year incremental CD ratio

remains in the range of 90%-100%, barring BOB

1 year Incremental CD ratio

Exhibit 42:

Private banks – the 1-year incremental CD ratio

stands in the range of 80%-125%

1 year Incremental CD ratio

160

109

115

111

101

74

98

78

85

125

76

81

121

121

80

Source: MOFSL, Company

*HDFC bank incremental CD ratio is significantly higher due to

merger and hence not shown above. Source: MOFSL, Company

Exhibit 43:

YoY change in the CD ratio of private and PSU banks

Private Banks

Axis Bank

DCB Bank

HDFC Bank

ICICI Bank

IndusInd Bank

Kotak Mahindra Bank

Federal Bank

RBL Bank

Bandhan Bank

IDFC First Bank

PSU Banks

Bank of Baroda

Canara Bank

Indian Bank

Punjab National Bank

State Bank of India

Union Bank

3Q23

89.8

83.4

86.9

86.8

83.9

90.2

83.5

81.57

90.04

110.58

3Q23

75.74

74.18

72.63

69.51

65.39

71.03

CD Ratio (%)

3Q24

92.8

82.7

110.5

86.6

88.7

88.0

83.1

86.20

93.83

101.60

3Q24

80.77

77.26

75.37

72.16

66.34

73.53

YoY change(bp)

293

-78

2,355

-21

483

-216

-36

463

380

-898

YoY change (bp)

503

308

274

265

95

250

Source: MOFSL, Company

26 February 2024

18

Financials

PSBs reported accelerated ABV growth over the past 3

years

Estimate ABV growth to remain healthy at ~18% CAGR over FY24-26







PSU banks have demonstrated significant outperformance over the recent

years, supported by strong earnings turnaround, robust balance sheet post long

drawn cleansing and reasonable valuations. From FY22 to date, the Nifty PSU

Banks index has risen by 160% vs. 28% returns of the Nifty Private Bank index.

We note that over FY21-24, the ABV growth for PSU Banks stood at robust 20%,

significantly ahead of Private Banks, which reported an average ABV growth of

15-16% during the same period.

Given that the asset quality improvement cycle at PSBs is still continuing, and

many are likely to see further moderation in credit cost, the ABV growth for

PSUs will thus likely remain higher than Private Banks. We thus estimate

average ABV growth for PSBs over FY24-26E to sustain at 18% vs. 16% for

Private Banks.

Exhibit 44:

PSBs have reported faster ABV growth; estimate 18% ABV CAGR for PSBs over FY24-26E vs. 16% CAGR for Private

Banks

ABV (PSU Bank)

BoB

CBK

INBK

PNB

SBIN

UNBK

Avg of PSBs

ABV (Private Bank)

AXSB

DCB

HDFC

ICICIBC

IIB

KMB

Avg of Pvt Banks

FY21

111.0

218.5

234.1

53.2

220.6

63.3

FY21

308.0

103.5

356.8

187.3

546.9

296.2

FY22

135.8

258.9

272.1

57.1

256.0

71.7

FY22

354.1

113.3

420.5

224.0

604.0

341.6

FY23

165.2

321.5

333.7

67.9

310.9

93.8

FY23

389.5

133.3

489.8

267.1

690.7

397.6

FY24E

195.0

407.3

398.2

85.7

360.8

113.2

FY24E

459.0

144.9

555.8

316.3

789.9

459.2

FY25E

227.1

500.7

458.3

95.9

428.8

131.8

FY25E

539.0

162.3

630.6

373.0

913.3

528.6

FY26E

265.3

604.9

530.7

108.4

509.6

153.5

FY26E

636.0

183.0

723.1

439.6

1,063.9

609.2

CAGR

(FY21-24E)

21%

23%

19%

17%

18%

21%

20%

CAGR

(FY21-24E)

14%

12%

16%

19%

13%

16%

15%

CAGR

(FY24E-26E)

17%

22%

15%

12%

19%

16%

18%

CAGR

(FY24E-26E)

18%

12%

14%

18%

16%

15%

16%

Source: MOFSL, Company

26 February 2024

19

Financials

Earnings on a roll – Revisiting Bull, Bear case scenarios











PSU banks have witnessed a remarkable resurgence in recent years, marked by

strong earnings turnaround, robust balance sheet following the restructuring,

and attractive valuations.

Profitability for PSU banks crossed ~INR1t mark in FY24, which is attributed to

significant improvements in asset quality, healthy credit growth, and steady

margins. PSBs earnings have shown a robust trend, with earnings contribution

to Nifty increasing from 0.7% in FY19 to ~9% in FY23, accompanied by a robust

increase in market capitalization.

Asset quality of PSBs have seen tremendous improvement with NNPA ratio

expected to decline to 0.6% by FY26E, equivalent to private banks, supported by

controlled credit costs and overall profitability.

PSBs are well positioned for continued growth and stability, with underlying

earnings quality improving significantly, suggesting sustainability in delivering

1% RoA, which previously was seen as an aspirational one. In fact, in one of our

earlier report on PSU Banks titled ‘Public Sector Banks: The Homecoming of

RoA!’, we highlighted PSB’s earnings recovery to 1% is not a one-off instance,

but more like a long overdue mean reversion.

We have attempted a scenario analysis for PSBs earnings under both Bull and

Bear case scenarios.



Under the Bull case, we are factoring in a 15bp increase in margins and a

20bp further decline in credit cost (barring SBI) over our base case

estimates.



While in the Bear case, we are factoring in a 20bp decline in margins and a

20-30bp increase in credit costs.



The below table thus shows the changes in key metrics under different

scenarios and compares them to our base case projections.

26 February 2024

20

Financials

Exhibit 45:

Scenario analysis: Changes in key metrics under Bull and Bear case projections

INRb

Net Interest Income

Operating Profits

PAT

RoA (%)

RoE (%)

BV

ABV

EPS

INRb

Net Interest Income

Operating Profits

PAT

RoA (%)

RoE (%)

BV

ABV

EPS

INRb

Net Interest Income

Operating Profits

PAT

RoA (%)

RoE (%)

BV

ABV

EPS

Base case

FY25E FY26E

497.5

561.4

352.1

409.3

203.3

229.0

1.19

1.19

17.5

17.0

245.5

283.7

226.9

263.5

39.3

44.2

Base case

FY25E FY26E

247.0

274.4

178.1

199.3

95.5

111.3

1.16

1.23

16.8

16.9

473.5

546.1

456.6

528.8

70.9

82.6

Base case

FY25E FY26E

1,788.1 2,004.2

1,121.8 1,281.0

721.1

829.0

1.11

1.15

19.3

19.0

465.1

542.1

427.5

504.0

80.8

92.9

Bank of Baroda

Bull case

FY25E FY26E

5%

5%

7%

6%

15%

18%

1.37

1.40

19.9

19.4

4%

5%

4%

4%

15%

18%

Indian Bank

Bull case

FY25E FY26E

3%

3%

4%

4%

21%

20%

1.41

1.47

20.0

19.3

4%

6%

2%

4%

21%

20%

SBI

Bull case

FY25E FY26E

4%

4%

7%

7%

13%

12%

1.25

1.28

21.6

20.6

3%

4%

3%

4%

13%

12%

Bear case

FY25E FY26E

-7%

-7%

-10%

-10%

-27%

-24%

0.88

0.91

13.2

13.8

-4%

-7%

-5%

-7%

-27%

-24%

Bear case

FY25E FY26E

-8%

-8%

-10%

-10%

-19%

-22%

0.95

0.96

13.8

13.8

-5%

-6%

-5%

-7%

-19%

-22%

Bear case

FY25E FY26E

-9%

-9%

-14%

-14%

-29%

-30%

0.79

0.81

14.0

14.4

-5%

-6%

-6%

-7%

-29%

-30%

Base case

FY25E FY26E

388.2

433.7

317.6

359.4

170.8

197.5

1.11

1.16

19.5

18.8

546.1

649.0

495.7

594.9

94.2

108.8

Base case

FY25E FY26E

431.6

460.9

275.2

296.4

122.0

155.3

0.74

0.86

11.5

13.1

104.6

117.7

95.9

108.0

11.1

14.1

Base case

FY25E FY26E

392.6

425.8

306.0

334.9

165.1

185.4

1.13

1.16

17.4

17.0

140.8

160.8

131.4

151.4

22.3

25.0

Canara Bank

Bull case

FY25E FY26E

5%

5%

6%

6%

17%

17%

1.30

1.35

22.5

21.0

4%

5%

4%

5%

17%

17%

PNB

Bull case

FY25E FY26E

5%

5%

7%

7%

29%

19%

0.95

1.02

14.6

14.9

4%

5%

4%

4%

29%

19%

Union Bank

Bull case

FY25E FY26E

5%

5%

6%

6%

17%

16%

1.32

1.34

20.1

18.9

3%

5%

4%

5%

17%

16%

Bear case

FY25E FY26E

-8%

-8%

-9%

-9%

-24%

-25%

0.84

0.87

15.1

15.0

-4%

-6%

-5%

-6%

-24%

-25%

Bear case

FY25E FY26E

-7%

-7%

-11%

-11%

-27%

-32%

0.54

0.59

8.6

9.4

-4%

-6%

-5%

-5%

-27%

-32%

Bear case

FY25E FY26E

-7%

-7%

-9%

-9%

-21%

-23%

0.89

0.90

14.0

13.9

-4%

-6%

-5%

-6%

-21%

-23%

26 February 2024

21

Financials

Valuation and View

PSBs have made a sharp comeback in recent years, with the Nifty PSU Bank Index

alone delivering 162% returns since Mar’22, overshadowing the 24% returns of the

Nifty Private Bank index over the same period. We estimate the top six PSBs under

our coverage to report a PAT of INR1.5t/INR1.7tn in FY25/FY26, while the sector’s

RoA/RoE are expected to improve to 1.2%/17.9% by FY26E.



We believe that while the PSU rally has been sharp and the sector has seen

significant re-rating, the stock valuations still look reasonable in context to

business growth and profitability (~18-19% RoE over FY24-26E).



Considering PSBs’ valuation history, their trading multiples may look constrained

now; however, the quality of earnings, growth outlook, and broader re-rating in

Public Sector enterprises will enable steady performance for the sector.



PSU Banks are well positioned to pursue healthy growth (given ample balance

sheet liquidity) and maintain resilient margins as they benefit from residual

MCLR repricing. The decline in bond-yields along with continued improvement

in credit cost (barring SBI) will support healthy profitability.



Several PSBs have raised capital from the market and are thus well poised to

benefit from any revival in corporate demand, particularly as the capex cycle

recovers after the general elections. We estimate ABV for our coverage PSBs to

register a healthy CAGR of ~18% over FY24-26.



We believe that sustained and consistent performance on return ratios and a

conducive macro-environment can drive further re-rating of the sector.

We

maintain our OW stance and roll forward our PTs to FY26. Top picks: SBIN &

UNBK.

26 February 2024

22

Financials

Dupont for PSU Banks

Exhibit 46:

Dupont analysis of Bank of Baroda

Y/E MARCH

Interest Income

Interest Expense

Net Interest Income

Other income

Total Income

Operating Expenses

Employee cost

Others

Operating Profits

Core operating Profits

Provisions

PBT

Tax

RoA (%)

Leverage (x)

RoE (%)

FY19

6.63

4.17

2.46

0.84

3.30

1.50

0.67

0.83

1.80

1.67

1.70

0.09

0.04

0.06

15.9

0.9

FY20

7.84

5.01

2.83

1.06

3.90

1.95

0.99

0.96

1.95

1.67

2.14

-0.19

-0.24

0.06

15.8

0.9

FY21

6.09

3.60

2.49

1.12

3.61

1.78

0.99

0.79

1.83

1.54

1.35

0.48

0.41

0.07

15.5

1.1

FY22

5.74

3.06

2.68

0.94

3.63

1.78

0.98

0.80

1.84

1.62

1.07

0.77

0.17

0.60

14.9

8.9

FY23

6.55

3.53

3.02

0.73

3.76

1.79

1.0

0.82

1.96

1.89

0.52

1.44

0.41

1.03

14.9

15.3

FY24E

7.46

4.56

2.90

0.92

3.82

1.81

1.0

0.82

2.01

1.95

0.39

1.62

0.46

1.17

14.5

16.9

FY25E

FY26E

7.56

7.51

4.64

4.59

2.92

2.92

0.94

0.96

3.85

3.88

1.79

1.75

1.0

1.0

0.81

0.79

2.06

2.13

2.02

2.10

0.45

0.52

1.61

1.61

0.42

0.42

1.19

1.19

14.0

13.7

16.7

16.3

Source: MOFSL, Company

FY25E

FY26E

7.13

7.12

4.62

4.57

2.52

2.55

1.37

1.41

3.89

3.96

1.83

1.85

1.13

1.14

0.70

0.71

2.06

2.12

1.90

1.95

0.57

0.56

1.49

1.56

0.38

0.40

1.11

1.16

16.20

15.10

17.95

17.55

Source: MOFSL, Company

FY25E

FY26E

7.52

7.47

4.51

4.44

3.01

3.03

1.07

1.09

4.08

4.12

1.91

1.92

1.21

1.21

0.70

0.71

2.17

2.20

0.61

0.56

1.55

1.64

0.39

0.41

1.16

1.23

14.4

13.7

16.8

16.9

Source: MOFSL, Company

Exhibit 47:

Dupont analysis of Canara Bank

Y/E MARCH

Interest Income

Interest Expense

Net Interest Income

Non Interest income

Total Income

Operating Expenses

Employee cost

Other operating expenses

Operating Profits

Core operating Profits

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY19

7.14

4.93

2.21

1.00

3.21

1.60

0.92

0.67

1.61

1.00

1.97

(0.35)

(0.41)

0.05

18.27

0.97

FY20

6.90

5.05

1.85

1.10

2.95

1.63

1.01

0.63

1.32

1.21

1.57

(0.25)

0.07

(0.32)

18.80

(5.92)

FY21

6.29

4.10

2.19

1.35

3.54

1.76

1.15

0.60

1.79

1.52

1.45

0.34

0.10

0.23

19.97

4.64

FY22

5.83

3.61

2.22

1.39

3.60

1.55

0.95

0.60

2.05

1.83

1.19

0.87

0.28

0.48

19.05

9.09

FY23

6.56

4.12

2.44

1.46

3.90

1.75

1.07

0.68

2.15

2.01

1.05

1.10

0.28

0.82

18.42

15.18

FY24E

7.11

4.52

2.59

1.31

3.89

1.81

1.12

0.69

2.08

1.92

0.70

1.38

0.36

1.02

17.51

17.91

Exhibit 48:

Dupont analysis of Indian Bank

Interest Income

Interest Expense

Net Interest Income

Other Income

Total Income

Operating Expenses

Employees

Others

Operating Profits

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY19

7.20

4.57

2.63

0.71

3.34

1.51

0.83

0.67

1.83

1.73

0.11

-0.01

0.12

16.6

2.0

FY20

7.26

4.68

2.58

1.12

3.70

1.50

0.84

0.66

2.20

1.74

0.47

0.21

0.26

16.7

4.3

FY21

6.57

3.94

2.63

0.95

3.58

1.74

1.07

0.67

1.84

1.35

0.49

-0.02

0.50

19.4

9.8

FY22

6.00

3.42

2.58

1.07

3.65

1.69

1.03

0.65

1.96

1.47

0.49

-0.11

0.61

18.5

11.2

FY23

6.50

3.58

2.93

1.03

3.96

1.75

1.09

0.66

2.21

1.35

0.86

0.09

0.76

17.4

13.3

FY24E

7.57

4.46

3.11

1.04

4.16

1.90

1.21

0.69

2.26

0.82

1.44

0.36

1.07

15.8

16.9

26 February 2024

23

Financials

Exhibit 49:

Dupont analysis of Punjab National Bank

Annual DuPont

Interest Income

Interest Expense

Net Interest Income

Other Income

Total Income

Operating Expenses

Employees

Others

Operating Profits

Core operating Profits

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY19

6.66

4.43

2.23

0.96

3.18

1.50

0.90

0.59

1.69

1.55

3.68

(1.99)

(0.70)

(1.29)

17.94

(23.24)

FY20

6.70

4.53

2.17

1.16

3.33

1.49

0.87

0.62

1.84

1.63

1.74

0.09

0.05

0.04

14.99

0.63

FY21

7.73

4.81

2.92

1.14

4.06

1.94

1.16

0.78

2.12

1.78

1.79

0.33

0.14

0.19

13.64

2.64

FY22

5.81

3.59

2.23

0.96

3.19

1.57

0.92

0.65

1.61

1.38

1.28

0.34

0.07

0.27

13.81

3.71

FY23

6.13

3.65

2.48

0.87

3.36

1.74

1.07

0.67

1.62

1.70

1.31

0.31

0.13

0.18

14.21

2.57

FY24E

6.99

4.35

2.64

0.84

3.48

1.79

1.13

0.66

1.69

1.78

0.86

0.83

0.30

0.53

14.59

7.79

FY25E

FY26E

7.09

7.02

4.48

4.48

2.61

2.55

0.87

0.90

3.48

3.45

1.82

1.81

1.11

1.11

0.71

0.70

1.66

1.64

1.76

1.75

0.58

0.49

1.08

1.15

0.35

0.29

0.74

0.86

14.47

14.24

10.67

12.23

Source: MOFSL, Company

Exhibit 50:

Dupont analysis of State Bank of India

Y/E MARCH

Interest Income

Interest Expense

Net Interest Income

Non Interest income

Total Income

Operating Expenses

Employee cost

Others

Operating Profit

Core Operating Profit

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY19

6.81

4.33

2.48

1.03

3.51

1.95

1.15

0.80

1.55

1.47

1.49

0.06

0.04

0.02

18.27

0.44

FY20

6.74

4.17

2.57

1.19

3.76

1.97

1.20

0.77

1.79

1.56

1.13

0.66

0.28

0.38

18.87

7.16

FY21

6.25

3.64

2.61

1.03

3.63

1.95

1.20

0.75

1.69

1.54

1.04

0.65

0.17

0.48

19.35

9.31

FY22

5.79

3.25

2.54

0.85

3.39

1.81

1.05

0.75

1.58

1.51

0.51

0.91

0.25

0.67

19.55

13.01

FY23

6.32

3.57

2.76

0.70

3.45

1.86

1.09

0.77

1.59

1.62

0.31

1.28

0.32

0.96

18.87

18.05

FY24E

7.20

4.45

2.75

0.83

3.58

2.09

1.30

0.79

1.50

1.52

0.09

1.28

0.32

0.96

18.12

17.40

FY25E

FY26E

7.31

7.28

4.56

4.50

2.76

2.78

0.81

0.81

3.57

3.59

1.84

1.81

1.06

1.05

0.78

0.77

1.73

1.78

1.76

1.81

0.24

0.24

1.49

1.54

0.38

0.39

1.11

1.15

17.39

16.50

19.33

18.97

Source: MOFSL, Company

Exhibit 51:

Dupont analysis of Union Bank

Y/E MARCH (%)

Interest Income

Interest Expense

Net Interest Income

Non Interest Income

Total Income

Operating Expenses

Employees

Others

Operating Profits

Core Operating Profits

Provisions

PBT

Tax

RoA

Leverage (x)

RoE

FY19

6.94

4.86

2.08

0.91

2.99

1.46

0.64

0.82

1.53

1.42

2.33

(0.80)

(0.20)

(0.60)

20.88

(12.54)

FY20

7.13

4.94

2.19

1.01

3.20

1.44

0.64

0.80

1.76

1.48

2.53

(0.77)

(0.22)

(0.55)

19.04

(10.56)

FY21

6.57

4.21

2.36

1.12

3.48

1.60

0.89

0.71

1.88

1.49

1.65

0.23

(0.05)

0.28

18.28

5.08

FY22

6.01

3.55

2.46

1.11

3.57

1.63

0.90

0.74

1.94

1.64

1.18

0.76

0.30

0.46

18.02

8.34

FY23

6.54

3.89

2.65

1.19

3.84

1.78

1.00

0.77

2.06

1.98

1.08

0.98

0.30

0.68

17.88

12.22

FY24E

7.41

4.68

2.73

1.15

3.88

1.73

0.99

0.74

2.15

2.05

0.55

1.59

0.54

1.05

16.65

17.49

FY25E

FY26E

7.43

7.36

4.74

4.70

2.69

2.67

1.15

1.17

3.84

3.84

1.74

1.74

0.99

0.99

0.75

0.76

2.10

2.10

2.00

1.98

0.55

0.54

1.55

1.56

0.42

0.40

1.13

1.16

15.35

14.65

17.39

17.01

Source: MOFSL, Company

24

26 February 2024