SBI, BOB, BoM, Union Bank, Canara Bank: Target prices for these PSU bank stocks

The Indian public sector banking (PSB) sector is witnessing a significant turnaround, according to a report by HDFC Institutional Equities. The sector, once considered structurally broken, is now showing early signs of recovery, driven by governance reforms, digital modernisation, and improved earnings quality. This transformation is reflected in PSBs stabilising their loan market share and enhancing customer service standards. Despite these positive developments, investor scepticism about earnings sustainability remains.

HDFC Institutional Equities has introduced a proprietary "HSIE PSB Scorecard" to evaluate PSBs across various parameters. The analysis suggests that the PSB universe offers a favourable risk-reward profile, particularly for mid-tier PSBs with scalable operations and clean balance sheets. Key recommendations from the brokerage include State Bank of India (SBIN) with a target price of Rs 1,035, Bank of Baroda (BOB) at Rs 290, Indian Bank (INBK) at Rs 735, and Bank of Maharashtra (BOMH) at Rs 70. Additional recommendations include Union Bank of India (UNBK) and Canara Bank (CBK) with suggestions to add them at target prices of Rs 160 and Rs 110, respectively.

The report notes that PSBs have significantly repaired their balance sheets, with post-Covid gross slippages moderating to 1.4 per cent, compared to private banks' 2.4 per cent. A noteworthy trend is the aggressive write-offs, which account for 1.3 per cent of assets, aiding in an accelerated clean-up of balance sheets. This has resulted in higher credit costs but positions PSBs to better withstand asset quality volatility.

The sector's core earnings are expected to have further growth potential. "Our discussions with bankers suggest that PSBs are likely to incrementally migrate their vehicle loans to a fixed-rate book (in line with private banks)," the report states. This shift is anticipated to help PSBs avoid sharp net interest margin (NIM) compressions experienced in previous rate cycles.

Additionally, HDFC Institutional Equities forecasts a 15 per cent compound annual growth rate (CAGR) in core earnings for PSBs from FY25-27, driven by normalisation in NIMs and gains in productivity and efficiency. Such improvements are expected to bolster the overall profitability and sustainability of public sector banks.

The Indian PSB sector's secular turnaround is attributed to a combination of balance sheet repair, recapitalisation, and digital advancements. These factors have contributed to a 52 basis points gain in market share during FY25, demonstrating enhanced customer franchise quality and service standards.

HDFC Institutional Equities reaffirms its highest conviction in SBIN, citing it as a strong buy due to its robust market position and growth prospects. The report also highlights the potential of BOB, INBK, and BOMH, noting their growth and recapitalisation triggers. "We reiterate SBIN (TP Rs 1,035) as our highest-conviction BUY; across each successive market capitalization bucket, our high conviction BUYs are: BOB (TP Rs 290), INBK (TP Rs 735), and BOMH (TP Rs 70). We also initiate on UNBK (ADD, TP Rs 160) and CBK (ADD, TP Rs 110)," it states.

Overall, the report by HDFC Institutional Equities presented a positive outlook for the Indian public sector banking sector, identifying key opportunities and potential growth areas that can be leveraged by investors seeking favourable returns. The sector's evolution reflects a broader trend of structural improvement, with future growth expected to continue along these lines.