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Is the worst behind for state-owned banks?

Some brokerages upgrade targets for SBI, PNB, BOB, among others, after run-up in their stock prices

Hamsini Karthik  |  Mumbai 

Is the worst behind for state-owned banks?

After the March quarter results, analysts increased their caution on the entire banking pack. But the scepticism around state-owned (SOE) banks was way higher given the elevated concerns on asset quality.

While a few analysts termed the March quarter performance as signs of bottoming particularly for SOE banks as they had recognised a bulk of pain that quarter, June quarter performance appears to reiterate the same.

In fact, stocks of State Bank of India (SBI), Bank of Baroda (BOB), Union Bank and Canara Bank have returned 10-14 per cent gains in August, outperforming the BSE Sensex returns of 1.5 per cent in the same period. What’s also noteworthy is Punjab National Bank’s stock price almost doubled from its 52-week low of Rs 69.4 in February 2016.

With these stocks delivering stellar gains, analysts are relooking at their investment strategy on SOE banks. For instance, Citi is among the few foreign brokerages to turn positive on SOE banks. In a recent report on select SOE banks, it has upped its target price by 12–45 per cent on SBI, BOB, Union Bank and Canara Bank.

The upgrades in target price is on the back of an upward revision in price-to-book multiples of the above stocks. Citi has retained its ‘buy’ recommendation on SBI, PNB and BOB, while maintaining neutral view on Union Bank and Canara Bank.

Citi analysts believe that higher multiples and target prices are warranted though the operating environment remains tough. Stabilising asset quality trend, decent current account – savings account franchisee and capital adequacy which are at manageable levels warrants for upgrade. That said, the analysts warn that they do see significant structural and valuation constraints, and believe the asset cycle will take time to fix itself. However earnings and credit cost pressures have peaked, they affirm.

Is the worst behind for state-owned banks?
“While they face significant structural and competitive challenges, there is some franchise which cannot be entirely written off – particularly if the asset market is looking a little better”, the analysts add.

“There is at least one more stock leg up for the broader government banking sector, and there could be more for SBI and BOB, which should be able to compete in the upcycle, as they start clearing out the current asset challenges”.

Shweta Daptardar of KRC Research shares the view that SOE banks are at the cusp of a turn around and prefers PNB among the lot for the aggressive manner in which it is tackling the bad loans issue.

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First Published: Thu, September 01 2016. 21:34 IST