Motilal Oswal's bet on 5 PSU banks: BoB, SBI, PNB, Canara Bk, Union Bk

Motilal Oswal has come out with a report on public sector banks.

Public Sector Banks:

Bank of Baroda: We expect the bank to post earnings of 16% CAGR over FY11-13 due to 22% CAGR in loans and healthy operating parameters. While performance on core operating parameters like (1) margins, (2) CASA growth and (3) asset quality is commendable. Sustainability of operating parameters is a key for superior valuation and the scope for negative surprises is limited. Maintain Neutral.

Canara Bank: Over FY02-10, Canara Bank (CBK) posted superior return ratios of 1.1%+ and RoE of 23%+. Strong margin performance, robust business growth and lower credit costs are leading to sharp upgrades in earnings estimates over the past few quarters. Although margins are likely to moderate (17bp YoY in FY12), expected improvement in fee income growth and strong control over opex will ensure core operating profit growth of 20%+.

Despite building in higher credit costs of 60bp for FY12 and FY13 (v/s 40bp in FY11), we expect return ratios to be strong with RoA of ~1.3% and RoE of 23%+. Strong core operating performance and favorable valuations make CBK an attractive investment opportunity. The stock trades at P/BV of 1x FY13E. Maintain Buy, target price of Rs820 (1.4x FY13E BV).

Punjab National Bank: Worries due to deteriorating asset quality, higher employee related expenses on account of the second pension and its impact on profitability has led to underperformance of the stock against the Sensex and the Bankex. An improving economic scenario and strong core operating profit will help to reduce concerns over asset quality and provide a cushion to absorb higher credit costs without impacting profitability. We factor in core operating CAGR of over 22% and PAT CAGR of over 21% over FY11-13. We expect PNB to report the best RoA of 1.3% and RoE of 24% among large PSU banks. Buy with a target price of Rs1,385 (1.5x FY13E BV of Rs923).

State Bank of India (SBI): Strong fee and loan growth, fall in credit costs and operating leverage will keep return ratios strong. We expect RoA to improve from 0.9% in FY10 to ~1.1% in FY12 and FY13. RoE is likely to improve from ~15% in FY10 to 18% by FY13 (without assuming capital raising). The key risks include higher pension liabilities, further monetary tightening and any risk to industrial growth at the macro level, which can impact potential loan growth in FY12. SBI is our top pick in the sector with a target price of Rs3,550 (1.8x FY13E consolidated BV + Rs127 for insurance).

Union Bank of India: Union Bank of India (UNBK) is one of the few state-owned banks making extensive investments in building strong IT infrastructure, manpower training, and brand and branch makeovers. We believe this would enable the bank to grow faster than the industry. Under the leadership of Mr Nair, UNBK has reported loan CAGR of 22% v/s ~20% for the industry over FY06-11. Significant improvement in RoA is expected with a fall in credit cost and operating leverage. Capital will not be a constraint for growth as the Government of India has already infused Rs6.8b in FY11. We maintain Buy with a target price of Rs425 (1.4x FY13E BV).

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