The Reserve Bank of India, on Wednesday, hiked the repo rate by 35 basis points, in line with expectations. As a result, investors cheered and banking stocks gained momentum. While notable gains were seen in private banks, PSU banks were big winners.
In the meanwhile, Morgan Stanley has raised earnings estimates and valuation multiples for most public sector banks. It believes that banks will continue to do well over the next few years supported by higher margins and sustained loan growth.
The Nifty 50 has gained 5.44%, while the Nifty PSU Bank index has gained a whopping 63.23% on a year-to-date (YTD Basis). In fact, the Nifty PSU Bank hit a new high of 4,277.75 points on Tuesday after Morgan Stanley’s update on the banks. The shares of public sector banks (PSBs) were on a roll, in an otherwise weak market.
The shares of the Central Bank of India rose sharply to the tune of 9.29%, UCO Bank gained 7.09% and Indian Overseas Bank escalated by 6.52%. In the past two days, Punjab and Sind Bank shot up 15.4%, IDBI Bank surged 13.04% and the Union Bank of India gained 5.6%.
“Over the past two years, Indian banks have seen sharp moderation in new NPL (Non-Performing Loan) formation, which, coupled with increased NPL coverage during COVID, has resulted in sharp moderation in credit costs. In recent quarters, this has been followed by sharp improvement in margins, helped by a rising rate cycle – higher rates, coupled with retail-funded balance sheets and higher shares of repo-linked loans, have led to up-front margin expansion in the current cycle. Loan books have yet to be fully repriced, which implies that margins might expand further before, then moderate in F24,” Morgan Stanley said in a report.
Bank stocks made investors richer by giving multibagger returns this year. Union Bank of India surged 126% in the past six months. Therefore, if an investor would have invested ₹ 1 lakh in the bank six months ago the value of their holdings would have been ₹ 2.26 lakhs today!
Similarly, the Bank of Baroda surged 109% on a year-to-date basis. An investment of ₹ 1 lakh at the beginning of this year would fetch ₹ 2.09 lakhs today!
Targets
The global research firm has maintained an overweight rating and has raised the target price of Bank of India to ₹ 125.00 from the existing ₹ 95.00. The new target price indicates an upside of 33.26% as compared to its share price of ₹ 93.80
It has an overweight rating on Bank of Baroda, with a target price of ₹ 220.00. This translates to an upside of 25.14% as compared to its share price of ₹ 175.80.
Morgan Stanley has an underweight rating on Canara Bank but has increased its target price from ₹ 280.00 to ₹ 345.00. This indicates an upside of 9.21% as compared to the current share price of ₹ 315.90.
It has an equal weight rating on Punjab National Bank with a target price of ₹ 60. This implies an upside of 7.71% as compared to its current share price of ₹ 55.70.
The research firm has a target of ₹ 715 on the shares of the State Bank of India. This suggests an upside of 17.93% as compared to its share price of ₹ 606.30.
Written by Simran Bafna
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