Kotak Securities downgrades the rating on Canara Bank and Punjab National Bank. The brokerage firm has downgraded the rating of Canara Bank to “Reduce” while that of Punjab National Bank to “Sell”. However, it iterates a “Buy” rating on the stock of State Bank of India, said preferred stock among PSU banks. Kotak has maintained the “Add” rating for Bank of Baroda and Union Bank.
The brokerage house said that it sees the banking sector as attractive. The rational brokerage gave was that the banks’ profitability has increased due to lower provisions and higher revenue recovery from bad loan resolutions. Now, this has supported asset quality for PSU banks and instilled confidence in the brokerage house. The Tier-2 PSU banks’ net NPA ratio came down to 1%, which means less amount will be kept aside and will increase profitability. “This drives our expectation of a meaningful decline in credit cost in FY2025E,” said Kotak Securities.
Further, the research report by the brokerage house said, “as highlighted in our previous report, Tier-2 PSU banks have seen a sharp valuation re-rating over the past two years, resulting in a swift convergence in the valuations of all PSU banks closer to SBI.”
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This in turn has made it difficult to invest in Tier-2 PSU banks because SBI showed better results in all key metrics such as through-the-cycle credit cost, liability franchise, and asset franchise.
“We have incorporated the recent equity capital raise by Union Bank in our model and tweaked estimates marginally. We value the PSU pack as follows: SBI (~1.4X), BOB (~1.1X), and the rest (Canara, Union, and PNB) at ~1.0X FY2026E BVPS (adjusted) while maintaining the same pecking order,” the report read.