PSU Banks like SBI, Canara, Union poised for re-rating, according to this analyst

India's state-run lenders like State Bank of India Ltd., Canara Bank Ltd., Union Bank of India Ltd., Bank of Baroda Ltd., among others are poised for another round of re-rating, according to brokerage firm Motilal Oswal.

In its note titled "Well Poised for Re-rating 2.0," Motilal Oswal wrote that the target of achieving 1% Return on Assets (RoA) is now sustainable from being "aspirational" earlier. It also mentioned that the valuations of most of these PSU banks remain attractive even after a rally in 2023.

In fact, the PSU Bank index has tripled in value since 2021 and its market capitalisation crossed the mark of ₹13 lakh crore last Friday. The last three years has seen the index gain 45%, 71% and 33% (this year so far) respectively. This comes on the back of three years of negative returns between 2018 and 2020.

By financial year 2026, the earnings pool of PSU banks is likely to grow to 1.7 lakh crore from 57,300 crore in financial year 2022, according to Motilal Oswal. The brokerage also mentioned that the Liquidity Coverage Ratio of these banks is now at comfortable levels and they also carry a robust liability franchise.

Barring State Bank of India, the country's largest lender, wage provisions are likely to have a limited impact on these lenders and their operating expenses will also moderate, the brokerage wrote, adding that their asset quality is steadily improving and a lower SMA pool further augurs well.

Based on these factors, Motilal Oswal has revised price targets higher for lenders like SBI, Bank of Baroda, India Bank, Union Bank, Canara Bank and PNB.

Among the state-run lenders, the brokerage has picked SBI, Bank of Baroda and Canara Bank as its top picks.

The Nifty PSU Bank index is up 33% so far in 2023 with top performers being PNB (Up 62%), Central Bank of India (Up 57%) and Bank of Maharashtra (up 55%).