Morgan Stanley said the potential impact of Expected Credit Loss (ECL) guidelines on its covered PSU banking universe could range from 1 per cent to 2.5 per cent of loans. Public sector banks (PSBs) have shown strength on Dalal Street for the last one year as the Nifty PSU Bank index surged more than 100 per cent from its 52-week lows, before dropping over 14 per cent from its peak. Select state-run lenders have witnessed a steep profit booking in the year 2023 so far. According to the data from Ace Equity, these select lenders have corrected up to 35 per cent from their respective peaks after delivering multibagger returns in the last few months. Seven out of 12 PSU banks are in the bear grip, the data suggests. This means that these banks have dropped more than 20 per cent from their recent highs. Morgan Stanley said the potential impact of Expected Credit Loss (ECL) guidelines on its covered PSU banking universe could range from 1 per cent to 2.5 per cent of loans. It expects banks with better balance sheets to see further increases in valuation premium within SoE banks as the concerns around ECL sustain. "We get more selective on SoE banks after a strong performance over the past month and likely peaking of rates. Banks that face greater impact from ECL norms are likely to see a delay in the re-rating cycle, even as earnings estimate upgrades are set to continue," it said. Central Bank of India has topped among the losers, falling 35 per cent to Rs 27.38 on May 11, 2023, from its 52-week highs at Rs 41.80 on December 14, 2022. It is followed by Indian Overseas Bank, which has wiped out one-third of its value from Rs 36.70 on December 16, 2022, to Rs 24.76 on Thursday. Punjab and Sind Bank and UCO Bank have plunged 29 per cent each from their respective peaks, followed by Union Bank of India, which is down 27 per cent. Bank of India has plunged about 25 per cent, while Punjab National Bank has corrected 22 per cent. "Union Bank of India reported a weak quarter as NII saw a sharp miss, led by moderation in margins, while higher recoveries from written-off accounts supported earnings. We cut our earnings estimates factoring in lower loan growth/NII. We reiterate our buy rating on the stock with a target price of Rs 95," said Motilal Oswal Financial Services. Bank of India's higher recoveries and upgrades along with contained write-offs led to stable asset quality performance, said Sharekhan by BNP Paribas. "We maintain a hold rating with an unchanged target price of Rs 102," it said. Morgan Stanley said it has become more selective on state-run banks and downgraded Punjab National Bank (PNB) to underweight and has trimmed its target price to Rs 55 from Rs 60 earlier. It has also slashed target price for Bank of India to Rs 120 (from Rs 125) and Canara Bank to Rs 305 (from Rs 345). The global brokerage firm prefers Bank of Baroda, Bank of India, and State Bank of India due to better balance sheets when compared with Canara Bank and PNB. Other public sector lenders, which are not in bear grip, include Bank of Maharashtra (16 per cent down), Indian Bank (14 per cent down) and Canara Bank (12 per cent down). Bank of Baroda and State Bank of India are down less than 10 per cent from their respective 52-week highs. Canara Bank's loan growth was healthy, whereas NIM was flat sequentially. Higher recoveries from write-offs and lower provisions resulted in better return ratios, said Kotak Institutional Equities, which has maintained a buy rating on the stock and raised its target price to Rs 370 from Rs 340 earlier. On the Contrary, Phillip Capital has downgraded Indian Bank to 'neutral' from 'buy' with a target price of Rs 330, citing limited upside potential. "Credit cost to remain elevated given high restructure loan. We do not see a material improvement in return ratio going ahead and ROA should remain below 1 per cent level," Phillip Capital said.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)