HSBC's Views on Indian PSU Banks
With regulatory forbearance ending on restructuring loans, asset quality trends in 1H will be very crucial. While 5/25 refinance
has taken off and could provide relief to operational infra and core sector project loans, stress formation outside these sectors
remains elevated. Similarly, bond yields have shot up the past fortnight and are likely to incur losses to PSU banks in 1Q. We suspect most PSU banks might have shifted meaningful quantum of SLR securities from HTM to AFS as well as parked incremental purchase in AFS category, which could result in higher MTM losses. This is crucial as in 4Q, excluding treasury gains, most PSU banks’ PBT dropped sharply.
We continue to remain cautious on PSU banks as macro outlook remains subdued along with weak capital adequacy for most banks. We cut earnings estimates between 4% (SBI) and 13% (BoB) as we reduce treasury gains and margins and increase credit costs for most banks. We maintain a Hold on BoI and UNBK as they continue to trade at 0.5-0.6x P/AB, while we remain Reduce on BoB, PNB
and CBK, where valuations are still out of sync with RoA. We remain Hold on SBI, given its better top management, good capitalisation levels and relatively better profitability.
