PNB, Canara Bank, SBI, BOB, BOI: 2 PSU bank stocks for 14-17% upside 

InCred Equities in its latest note said that profitability for public sector banks (PSU banks) is expected to moderate, as savings account deposits — which constitute approximately 30 per cent of average interest-earning assets — offer limited scope for downward repricing. Additionally, the brokerage noted that any significant benefit from the marginal cost of funds-based lending rate (MCLR) is unlikely due to heightened pricing competition.

The broking firm has a liking for private sector banks over their state-owned counterparts, as it cited their robust liability franchise, stronger potential for volume growth, and more attractive valuations.

Among state-owned entities (SOEs), InCred Equities identified Punjab National Bank Ltd (PNB) as a preferred pick. The PSU bank is expected to benefit from benign credit costs, favourable prospects from recoveries in written-off accounts, and potential tax rate reductions.

Canara Bank is projected to experience moderation in credit costs and is supported by attractive valuations, the report added.

State Bank of India (SBI) and Bank of Baroda (BoB) were acknowledged as strong franchises among SOE banks. However, InCred Equities assigned a 'Hold' rating to both, primarily due to valuation concerns.

The firm also stated, “Low on-balance sheet liquidity and limited profitability have led us to assign a HOLD rating to Bank of India (BoI). With this report, we are initiating coverage on BoB, BoI, Canara Bank, and PNB.”

It is worth noting that PSU bank stocks saw a significant rally between March 2021 and July 2024, outperforming their large private sector peers. This performance was underpinned by improvements in balance sheets, easing credit costs, and strong growth. Additionally, robust non-core income contributed to profitability during this period.

InCred Equities highlighted that valuations for SOE stocks re-rated from 0.6 times one-year forward price-to-book value (P/BV) in March 2021 to 1.3 times in July 2024. However, over the past six months, concerns regarding growth and margin outlook, along with uncertainty surrounding the quantum of repo rate cuts, have triggered a partial de-rating. As a result, SOE stocks have declined by 15 per cent from July 2024 levels. The report concluded that a meaningful re-rating appears unlikely and will be contingent on both volume growth and margin performance.

PSU banks recorded a year-on-year growth of 14 per cent in the third quarter. Going forward, growth prospects will be closely linked to balance sheet liquidity and the ability to mobilise deposits. InCred Equities expects non-SBI SOE banks to achieve growth in the range of 12–13 per cent over FY26F/27.