Morgan Stanley upgrades two PSU banks, sees limited upside in others

NEW DELHI: Morgan Stanley has upgraded two PSU banks and raised price targets for others. The foreign brokerage sees balance sheets of state-owned banks improving, capping the downside risk for them.

Valuations of PSU banks are cheap at 0.4-0.5 times expected FY22 book value. However, the upside for most of them is limited as not all of them will benefit equally from the corporate recovery cycle.

"We raise earnings/price targets to factor in higher PPOP and lower credit costs and lower dilution. Our preferred (PSU) bank is . Upgrade Bank of Baroda and given cheap valuations. We remain underweight on Canara Bank and Bank of India given low profitability,” said Rahul Gupta, equity analyst at Morgan Stanley.

Morgan Stanley has a target of Rs 600 on SBI, which means a 52 per cent upside from the current level. The brokerage sees 21 per cent and 16 per cent potential upside in Bank of Baroda and Punjab National Bank, respectively. It doesn’t see any upside in Bank of India and expects 3 per cent downside in Canara Bank.
The brokerage believes there could be near term upside but it prefers large private banks and SBI to play the corporate recovery cycle.

“For (PSU) banks, excluding SBI, we see structural challenges which will keep return ratios muted – limiting any significant re-rating potential beyond the short cyclical upswing,” said Gupta.

Analysts expect public sector banks to continue to lose loan market share to private lenders given technology changes, strong competition and a weak internal rate of capital generation.

“More importantly, we note that incremental market share for PSU banks in overall deposits has also been weakening in recent years – driven by term deposits as well as accelerated market share loss in savings deposits in urban/semi-urban areas,” Morgan Stanley said.

"Margin of safety, which refers to the potential bad loans absorption capability, remains low for PSU banks, which also doesn’t work in their favour. This will become problematic in case the macro recovery is softer than expected."