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Analysts Bullish on PSU Banks

August 28, 2009

Resumption of capital flows has reduced stress on asset quality. Moreover, core revenue momentum should pick up strongly in F2H10. Given valuations, analysts believe that SOE banks are the best way to play this theme and are likely to outperform their private sector peers. We continue to like wholesale funded institutions as well.

Bond yields are moving up and there are expectations of tightening. SOE banks are now relatively immune from MTM losses, unless yields spike up more than 200 bps. Moreover, the 5 year trend of contracting spread on bond portfolios is behind us – implying rising yields will cause NIMs to move up. Expect stocks to do materially well in F2H10.

In the F1Q10 results, SOE banks’ core ROE averaged mid-teens. We expect NIMs to improve from 3Q onwards; this, coupled with strong fees, should cause profitability to keep improving. We expect reported ROE to average 16% for SOE banks this year.

Top Down Picks include SBI, PNB, Bank of India, Bank of Baroda and Union Bank.

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