2 PSU Stocks You Could 'Bank' Upon

Public sector undertaking (PSU) banks have been on investors' radar over the past 6-8 months, given the attractive valuations they trade at and a revival in their earnings.

And in the past few days, two PSU banks - Union Bank of India and Canara Bank - have reported strong operational performance in the June 2023 quarter.

Investors on Dalal Street are optimistic that the growth momentum of these PSU banks will continue during the current financial year.

On Monday, Canara Bank reported a 74.8% year-on-year (YoY) growth in its net profit to Rs 35.3 billion (bn) in the June 2023 quarter, helped by a steady growth in net interest income (NII).

NII jumped 27.7% YoY to Rs 86.7 bn in the quarter under review. A fall in provisions and contingencies also helped, that fell 26.3% YoY. The Bengaluru-based bank saw its net profit go up 86.7% YoY during the financial year ended March 2023.

The PSU bank also grew its loans by 14.5% YoY to Rs 8.55 trillion (tn) in the first quarter of the current financial year helped by continued buoyant demand for retail loans.

Meanwhile, in the case of Mumbai-based Union Bank of India, it had reported a growth of 107% YoY in its net profit to Rs 32.4 bn in the June 2023 quarter, helped by a 13.9% YoY growth in its advances and loans to Rs 7.7 tn.

Growth prospects

Union Bank of India has guided for loans/advances growth of 10-12% YoY during FY24 and its gross NPAs going below 6% vis-a-vis 7.3% during June 2023 quarter.

However, the rising cost of deposits from customers could result in the Mumbai-based bank's net interest margin (NIM) weakening to 3% levels vis-a-vis 3.1% in the first quarter of FY24.

In the case of Canara Bank, net NPAs are expected to come down to 1.2% during FY24 versus 1.57% in the June 2023 quarter and it would help NIMs to be at 3.05% during FY24, similar to levels achieved in June 2023. Advances are expected to grow 10.5% during FY24 on a YoY basis.

The opportunity

PSUs banks are attractively valued vis-a-vis private sector rivals. Union Bank of India traded at Rs 88.8 in early trade today and its 52-week high of Rs 96.4 was reached on 14 December 2022.

Meanwhile, in the case of Canara Bank, it traded at Rs 337.8 in early Tuesday trade vis-a-vis its 52-week high of Rs 351.3 that was reached on 24 July 2023.

While both these PSU bank stocks have risen considerably over the last 6-8 months, they trade at relatively low valuations vis-a-vis well-established private sector banks.

In the case of Union Bank of India, it trades at a price to book value of about 0.95 times vis-a-vis a range of 0.3 and 0.7 times over the past 5 years.

In the case of Canara Bank, it currently trades at a shade more than one times book value for year ended March 2023. It has ranged between 0.3 and 0.7 times over the past five years.

In contrast, Kotak Mahindra Bank, at Rs 1,894 trades at nearly 3.4 times its book value.

Similar attractive valuations for PSU banks are also visible on a price to earnings (PE) basis - Union Bank of India trades at a PE multiple of nearly five times estimated standalone FY24 earnings and it is about 4.5 times for Canara Bank.

In contrast, Kotak Mahindra Bank trades at 29 times estimated standalone FY24 earnings.

Investors should keep a close watch on Union Bank of India and Canara Bank from a long-term perspective, given reasonably strong growth prospects of the PSU banks and buoyancy in the broader economy.

Happy Investing.

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