PSBs’ m-cap soared 221% in three years, says Motilal Oswal study

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The aggregate market cap of public sector banks (PSBs) has soared 221 per cent from ₹5.3-lakh crore in March 2021 to ₹17-lakh crore in February 2024, according to a Motilal Oswal Financial Services Ltd (MOFSL) report. However, the market-cap of private sector banks over the same period grew just 43 per cent to ₹30.4 lakh crore in February 2024 (despite HDFC-HDFC Bank merger).

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Recent capital raises and prior recapitalisation support by the government have strengthened PSBs’ capital adequacy ratios, enabling them to deliver healthy loan growth and cleanse their balance sheets, per the report put together by research analysts Nitin Aggarwal, Dixit Sankharva and Diksha Singhal. “PSBs have seen a remarkable turnaround, from record losses to record profits… The combined profitability of six PSBs (State Bank of India, Bank of Baroda, Indian Bank, Union Bank of India, Canara Bank and Punjab National Bank)  under our coverage will surpass ₹1-lakh crore in FY24. The strong earnings recovery is attributed to steady credit growth, significant improvements in asset quality, and stable to positive margins,” the analysts said.

Higher earnings

They underscored that PSBs reported higher earnings in FY23-FY24 than in the past one decade. “PSBs’ earnings contribution to total banking sector earnings has increased to FY15 levels, even as their loan market share has declined by about 20 per cent since then. We estimate the profitability of the top six PSBs under our coverage to improve to ₹1.74 lakh crore by FY26, nearly doubling over FY23 levels,” per the analysts’ assessment.

They estimated that the aggregate earnings share of PSBs in total banking sector earnings will remain resilient at about 48 per cent over FY25-26. “We believe that while NIMs (net interest margins) may remain range-bound with a slight downward bias, the improvement in opex ratios, scope for further credit cost reduction…and a healthy treasury performance will enable the sector RoA (return on assets) to reach about 1.2 per cent by FY26E,” the analysts said.

Considering PSBs’ valuation history, their trading multiples may look constrained now; however, the quality of earnings, growth outlook, and broader re-rating in public sector enterprises will enable steady performance for the sector, according to the report. “Several PSBs have raised capital from the market, which should aid business growth, particularly as the capex cycle revives post general elections,” the analysts opined.

They believe that sustained and consistent performance on return ratios and a conducive macroenvironment can drive further re-rating of the sector.

Market share erosion slows

While PSBs’ market share (both in deposits and advances) has declined consistently over the past years, the pace of market share erosion in loans to the private sector has moderated significantly over the recent years. The analysts noted that in the past three years, PSBs lost market share of about 300 basis points (bps) in loans vs 600-800 bps average loss in the preceding three-year blocks.

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Recent fund raises and notable enhancements in the balance sheet strength have contributed to the healthy loan growth in recent years. In FY23, PSBs clocked a loan growth rate of about 17 per cent, which is comparable to the 18 per cent growth rate achieved by private banks during the same period.

Given a low credit deposit (CD) ratio and ample balance sheet liquidity, MOFSL analysts expect PSBs’ credit growth to remain healthy over FY24-26.