Profitability set to drive stock performance for PSU banks

Public Sector Banks (PSBs) have emerged as a beacon of stability and profitability in India's banking sector, exhibiting a remarkable turnaround in recent years. Bolstered by sustained earnings growth and robust business fundamentals, PSBs are set to play a key role in driving stock performance, according to industry analysts.

Despite facing challenges in market share erosion to private banks, PSBs have delivered a stellar performance, with aggregate earnings crossing the Rs 1 lakh crore mark in the current financial year. Motilal Oswal's coverage of six PSBs forecasts a compounded annual growth rate (CAGR) of 21 per cent over the period from FY24 to FY26, with earnings projected to reach Rs 1.7 lakh crore by FY26. Key contributors to this growth trajectory include Punjab National Bank (PNB) and State Bank of India (SBI).

The Mumbai-based brokerage underscores the sector's potential, highlighting an estimated return on equity (RoE) of 18-19 per cent over FY24-26, underpinning the sector's resilience and profitability. Despite reasonable valuations, the quality of earnings, growth outlook, and broader re-rating in Public Sector Enterprises are expected to fuel steady performance for PSBs.

Capital infusion from recent market raises and government support has bolstered PSBs' capital adequacy ratios, enabling healthy loan growth and balance sheet optimisation. Notably, PSBs' market capitalization has surged, growing five times since FY20 to reach Rs 17 lakh crore by February 2024, indicating investor confidence in the sector's prospects.

PSBs' earnings recovery, driven by steady credit growth and improvements in asset quality, has been a standout feature, with aggregate earnings surpassing levels not seen in over a decade. Analysts anticipate further profitability enhancement, estimating earnings to nearly double by FY26, with PSBs' aggregate earnings share in total banking sector earnings remaining resilient at 48 per cent over FY25-26.

While PSBs have experienced a decline in market share, particularly in loans, the pace of erosion has moderated in recent years, thanks to strategic initiatives and balance sheet enhancements. Recent fund raises and strengthened balance sheets have contributed to healthy loan growth, signalling a potential reversal in market share dynamics.

PSBs' sustained profitability, coupled with a conducive macroeconomic environment, positions the sector for continued growth and stock performance. As PSBs consolidate their position as key drivers of India's banking landscape, investors are likely to closely monitor their performance and prospects in the coming years, Motilal Oswal said.