Morgan Stanley prefers Sbi among Psu banks, sees structural challenges for other government lenders
Public sector banks have been on a roll in 2021 with Nifty PSU Bank up more than 40% since the start of the year. In a recent memo, global brokerage firm Morgan Stanley said it prefers the SBI among PSBs and sees continuing structural challenges with other government lenders. He also raised the Bank of Baroda and the Punjab National Bank to equal weight on cheaper valuations.
However, it remains underweight Bank of India and Canara Bank due to low profitability.
“There could be a hike in the short term, but we prefer the big private banks and the SBI to play the corporate recovery cycle. the short cyclical recovery, “observed the brokerage.
Structural challenges for PSU banks include continued loss of balance sheet market share and a low margin of safety in case the macroeconomic recovery is slacker than expected, the brokerage said.
More importantly, he notes that PSU banks’ additional market share in overall deposits has also weakened in recent years – due to term deposits as well as the accelerating loss of market share of deposits from savings in urban / semi-urban areas.
A safety margin in PSU banks (excluding SBI) is less than -1 percent at 5 percent versus 6 percent at SBI and more than 10 percent
in private banks.
Morgan Stanley defines margin of safety as the potential absorption of bad debt
taking into account current equity / excess provisions and F22 PPoP assumptions.
However, he stressed that the balance sheets of PSU banks have improved and that the formation of bad loans should moderate in the future. The large injection of capital from the government, increased provisioning and some large clawbacks were positive points. In addition, as the slippages subside, Morgan Stanley expects the cost of credit to moderate gradually over the next few years.