India's state-run lenders can deliver returns of as much as 30 percent over the next 12 months, according to broking firm Motilal Oswal.
The brokerage believes that the profitability of the top seven PSU banks under their coverage can jump to as high as Rs 90,900 crore for the current financial year. That compares to a net loss of nearly Rs 60,000 crore in financial year 2017-2018 when many of these lenders were placed under the RBI's Prompt Corrective Action Framework.
The note further says that sustained and consistent performance on delivering healthy return ratios can result in further re-rating of these stocks as valuations are still inexpensive considering the growth and profitability outlook.
In an interaction with CNBC-TV18, Nitin Aggarwal of Motilal Oswal said that the growth in adjusted book value of PSU banks is nearly as high as their private counterparts.
Aggarwal also spoke about the asset quality of these lenders, which was an issue earlier but is now improving, aided by a recovery in corporate asset quality and robust provisioning.
He also shared his top picks for investment in the sector, naming
State Bank of India (SBI), Bank of Baroda (BoB) and Canara Bank as his top choices.
“SBI has been our top bet for all these years. And after SBI, we like BoB and Canara Bank in banks,” he said.
Aggarwal went on to explain that PSU Banks can deliver healthy return ratios going ahead, as there is no one-off in earnings of PSU Banks. He also noted that the re-rating of these banks will be based on the improvement in return ratios.
For the entire interview, watch the accompanying video