Strong buying interest drove the Nifty PSU Bank to rally over two percent in trade on Tuesday, June 24, as investors piled their capital into shares of public lenders. The confidence in PSU banking stocks came after domestic brokerage HDFC Securities noted that the sector is seeing signs of a 'secular turnaround.'
"The Indian PSU banking (PSB) sector, once considered structurally broken, is experiencing early signs of a secular turnaround, buttressed by a combination of governance reforms (balance sheet repair and recapitalization), modernized digital stack, and a gradual turnaround in the quality and sustainability of earnings," said the brokerage.
While the post-Covid PSB gross slippages (1.4 percent) have moderated below those of private banks (2.4 percent), PSBs have resorted to aggressive write-offs (1.3 percent of assets), reflecting in higher credit costs, simultaneously delivering an accelerated balance sheet clean-up.
The changes undertaken is beginning to reflect in PSBs finally stabilizing their loan market share (+52 bps market share gains during FY25), enhancing the quality of their customer franchise and service standards, and improving their return ratios.
At 12.30 p.m., the Nifty PSU Bank index rallied 2.3 percent, with Union Bank of India, Punjab & Sind Bank, and Canara Bank soaring up to 3 percent.
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However, the brokerage noted that despite improving profitability (FY25 RoAs approaching 1 percent), investors remain skeptical of the sustainability of these earnings. "Our analysis suggests that PSBs are on the cusp of a structural reflation in their core profitability trends over the medium-term," said HDFC Securities.
The brokerage added, "We believe that the PSB universe selectively offers a favourable risk-reward, especially mid-tier PSBs with scalable franchises, clean books, and likely recapitalization triggers."
HDFC Securities decided to reiterate its highest-conviction 'buy' on State Bank of India with a target price of Rs 1,035. Across different market capitalization segments, its top 'buy' recommendations include Bank of Baroda with a target of Rs 290, Indian Bank at Rs 735, and Bank of Maharashtra at Rs 70.
Additionally, HDFC Securities kicked off coverage on Union Bank of India and Canara Bank with an 'add' rating and target prices of Rs 160 and Rs 110, respectively.
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