Best PSU Bank Stocks To Buy

Elara Capital has identified the top PSU Bank Stocks To Buy

Elara Capital claims that PSU banks are unfairly being painted by the same broad brush of asset quality concerns. It explains that asset quality concerns have dogged the Indian banking space over the last four quarters with PSU banks being particularly affected as stock valuations have come off sharply across the board. It views the uniform punishment of PSU stocks to be unjustified, and a reflection more of uncertainty, heightened by opaque asset quality and volatile slippage reporting; than of real economic risk carried on the balance sheet. PSU banks have in fact reported divergent asset quality signs and there is a case to view their books to be qualitatively different.

Elara Capital says that differentiating banks using an alternative approach to view asset quality risk and so instead therefore of trying to take a call on the proven unpredictable parameters of (1) the quantum of further asset quality deterioration i.e slippages (2) the timing of their recognition and (3) the success rate of recoveries and reductions – it has assessed PSU banks on the basis of their ability to absorb further credit cost increases over and above the base case estimates. The traditional approach of using absolute levels of (expected) NPL’s to rank banks doesn’t assess their ability to price in the asset risk and penalizes those who may have better risk adjusted spreads and high profitability cushions.

Company	Rating	Market Cap		CMP	Target	Upside	P/E (x)		P/ Adj BV (x)		RoA (%)		RoE (%)

		INR bn	USD mn	INR	INR	%	FY13E	FY14E	FY13E	FY14E	FY13E	FY14E	FY13E	FY14E
		INR bn	USD mn	INR	INR	%	FY13E	FY14E	FY13E	FY14E	FY13E	FY14E	FY13E	FY14E

Allahabad Bank	Buy	70	1,246	140	235	68.2	3.3	2.7	0.6	0.5	1.0	1.0	18.1	19.1
AXIS Bank	Buy	399	7,093	963	1,398	45.1	7.5	6.2	1.5	1.2	1.7	1.7	21.1	21.4
Bank of Baroda	Buy	257	4,578	657	925	40.8	5.1	4.5	0.8	0.7	1.0	1.0	16.9	16.9
Bank of India	Accumulate	179	3,185	312	405	29.9	4.6	3.7	0.8	0.7	0.9	1.0	17.1	18.6
DCB	Buy	9	165	39	60	55.6	12.0	8.6	1.0	0.9	0.8	0.9	8.6	10.8
HDFC Bank	Reduce	1,144	20,355	487	536	10.0	17.3	13.6	3.3	2.8	1.5	1.6	17.3	19.4
ICICI Bank	Buy	912	16,222	793	1,206	52.1	11.4	9.2	1.4	1.3	1.6	1.7	12.8	14.4
Indusind Bank	Accumulate	142	2,520	303	371	22.4	13.8	10.2	2.7	2.2	1.6	1.7	20.4	23.0
Punjab National Bank Buy		240	4,273	708	1,026	44.9	4.1	3.5	0.8	0.7	1.1	1.1	19.1	19.8
State Bank of India	Accumulate	1,312	23,341	1,955	2,221	13.6	10.0	8.9	1.5	1.3	0.9	0.9	14.0	14.0
Union Bank of India	Buy	111	1,968	201	275	36.7	4.9	3.9	0.8	0.7	0.8	0.8	14.1	16.1
Yes Bank	Reduce	113	2,018	321	371	15.6	9.2	7.3	2.0	1.6	1.5	1.5	23.5	24.2

Stock selection using scoring framework

Applying this approach to the PSU coverage banks, Elara has assessed and scored its coverage banks on 5 parameters that cover profitability cushion and earnings capacity to absorb accelerated credit costs, credit risk, asset quality risk from restructured assets and finally valuation comfort.

Bank of Baroda, Punjab National bank and Allahabad Bank emerge as clear winners in the scoring model, and are also the top picks in the PSU space. ICICI Bank and DCB are top picks in the private bank space where the framework doesn’t lend well to differentiate amongst the banks.