The financial year ended March 2022 (FY22) was arguably a watershed year for public sector banks (PSBs) as their balance sheets are now healthy enough to start growing again after a long asset quality cycle, brokerage house Bank of America Securities (BofA Sec) sain in a recent report.
"There has been a recovery in loan growth, deposit growth has been steady and asset quality has improved. State-owned banks are now guiding for steady growth - in line with or better than the system. PSBs' aggregate loan growth in FY22 improved to 8.8 percent (versus private banks' 16 percent) - the highest since FY14. More importantly, growth across PSBs was more broad-based across segments," noted the brokerage.
It added that thanks to improving loan growth and asset quality, other PSBs saw continued NIM improvements, taking them to decade highs.
BofA expects loan growth for PSBs to improve sustainably to 12-13 percent levels (from 10 percent now). However, it pointed out that this could mark the end of easy market share gains for private banks.
"Liability will become a key structural issue/driver through FY23, especially in the context of tightening system liquidity. Pvt banks will likely look to offset this risk by growing more aggressively on the asset side," it further stated.
Among public banks, BofA re-iterates its positive view on SBI and Bank of Baroda as it expects valuation re-rating on continued improvements in growth-ROE profile. It added that these PSBs are also likely to benefit more from capex cycle.
The brokerage has a 'buy' rating on both SBI and Bank of Baroda, with target prices of ₹600 and ₹130 and, respectively.
BofA noted that the core profitability of public sector banks was back to the peaks last seen in the financial year 2014-15, but the gap with private banks remained wide.
On the asset quality front, it said the asset quality for public sector banks has been in a better shape than ever, led by a sharp decline in non-performing assets ratios and credit costs.
"PSBs are now much closer to private banks' level in terms of net NPA with SBI surpassing all. Credit cost for SBI was just around 50 basis points while (it was) 200-250 basis points for other PSBs and private banks," it said.
The brokerage further pointed out that state-owned banks would need to raise capital with growth picking up, but it might become challenging in the current capital market. Though banks haven't started planning capital raising so far, they only have a little surplus to support their target growth, it added.