PNB, Canara Bank, SBI, Union Bank: PSU bank stocks to buy after recent correction

Antique Stock Broking has turned positive on select PSU stocks such as Punjab National Bank (PNB) and Canara Bank following the recent correction. The brokerage, which analysed the historical performance of banking stocks during major global events and crude oil shocks, said PSU banking stocks tend to underperform their private banking peers on account of their higher treasury contribution to earnings. 

"In most instances, PSU banks have also more than reversed the losses within six months post the correction," it said.

Since February 28, PSU banks have fallen an average 11 per cent compared with 7 per cent drop for private banks, a trend similar to that in the past. In the near term, Antique said PSU bank earnings may reflect the pressure of the steepening G-sec yields on their quarterly trading profits. 

"Whilst we remain conservative on PSU bank margins and retain our target multiple of 1 time FY28 book value, we upgrade PNB and Canara Bank to 'Buy' based on valuation upside from CMP," it said.

Amongst PSU banks, Antique prefers State Bank of India (SBI) due to a strong liability franchise, continued market share gains in both advances and deposits coupled with margin levers in the form of unsecured Xpress credit growth and strong CA growth. It also likes Union Bank of India due to expectation of strong return on asset (RoA) of 1.15-1.25 per cent in FY27.

The brokerage suggested a target of R 140 on PNB, Rs 165 on Canara Bank, Rs 225 on Union Bank and Rs 1,210 on SBI.  

Given the intensifying deposit competition especially in the face of improving credit growth environment, banks with weaker liability franchises are likely to face higher headwinds, Antique said.

"In that context, we believe that the strength of the liability franchise is reflected in (i) liability mix - lower bulk deposit share and lower share of high cost borrowings, (ii) funding cost resilience even in an increasing rate environment," Antique said.

The brokerage analysed the correction in the banking stocks post major geo-political events, wars and crude oil shocks such as World trade center attack, 26/11 and Pulwama terrorist attacks in India, Russia Ukraine conflict, commodity super-cycle peak in 2007-08 and Iran sanctions in 2017-18. In most of these periods, PSU bank stocks corrected more in comparison to private banks, it said.

"However, in 3-6 months post the corrections PSU banks have more than reversed the losses in each of these periods, even higher than their private peers - with the exception of the period of crude oil shock during Iran sanctions in 2018-19, as it coincided with the corporate asset quality cycle where PSU banks were more impacted than private banks," Emkay said.

Going by previous trends and considering underlying growth trends, post stabilisation of the crisis, it expect PSU banks to revert back to pre-crisis multiples over the next six months.