PSU banks’ robust Q2 performance ring in analyst upgrades – Rising rivalry for deposits a concern in the medium term

• Public sector banks’ strong performance in Q2 has resulted in earnings and target price upgrades from analysts.
• Overall, PSU banks delivered a cumulative net profit of ₹25,685 crore in Q2, winning accolades from Finance Minister Nirmala Sitharaman.
• However, analysts remain watchful in the medium term as competition among banks to attract deposits is on the rise.

The Nifty PSU Bank index, which consists of 12 public sector banks, has surged 40% since the beginning of FY23, outpacing the broader Nifty Bank index’s 15% rise in this period. On Wednesday alone, the Nifty PSU Bank index was up 3.4%.

Public sector banks’ strong performance in Q2 has added to the positive sentiments, with analysts raising their earnings estimates and target price for the sector. The general consensus among analysts is that for the public sector banks, the “music could play a little longer” due to potential interest rate hikes by central banks.

To put things in perspective, for the September quarter, on a consolidated basis, State Bank of India’s net profit of ₹14,752 crore was higher than the ₹13,656 crore net profit reported by Reliance Industries.

“We believe SBI with its humongous size has reported consistently upbeat performance with this quarter seeing above-par growth in earnings and return ratios. The stock, long due for re-rating, should see a strong positive reaction,” stated a report by ICICI Direct Research.

Stocks of public sector banks have risen sharply in Q2, with Bank of Baroda leading the charge with 36% gains – the highest amongst the top four PSU banks during the period.

Bank	Stock price change in Q2
State Bank of India	13.9%
Bank of Baroda	35.9%
Canara Bank	26.2%
Punjab National Bank	26%

Source: NSE, July 1 to September 30, 2022

Here’s how PSU banks performed in Q2

State-run State Bank of India delivered its highest ever quarterly profit in Q2 at ₹13,265 crore, while Bank of Baroda’s net profit rose 52.8% sequentially to ₹3,313 crore during the quarter.

A sharp decline in loan provisions accompanied by a spike in net interest incomes helped drive the profitability of these two banks in the September quarter.

It’s not just the profit and net interest incomes that increased during Q2 – banks have also reported an improvement in asset quality, placing them in a better position when compared to the previous cycle, according to a report by global equity research firm Haitong International.

“Public sector banks are gradually improving their asset quality. Further, these banks are more focused on better-rated corporates and granular loans, which provides some comfort on the asset quality here on,” the report said.

Here’s how the top four public sector banks performed in Q2 in terms of net interest income (NII) and standalone net profit:

Bank	NII	QoQ change	Net profit	QoQ change
State Bank of India	₹35,183cr	13%	₹13,265cr	119%
Bank of Baroda	₹10,174cr	15%	₹3,313cr	53%
Canara Bank	₹7,434cr	10%	₹2,525cr	25%
Punjab National Bank	₹8,271cr	10%	₹411cr	33%

Source: Company reports

Overall, India’s 12 public sector banks reported a cumulative net profit of ₹25,685 crore in Q2, with SBI alone contributing 53% to the pool. The strong showing also won these banks accolades from Finance Minister Nirmala Sitharaman.

Earnings and target price upgrades pour in

The strong showing in Q2 has HSBC bullish on the prospects of SBI and Bank of Baroda – the brokerage has raised its full-year estimates for earnings, net interest income and loan growth for the two lenders.

Bank	Metric	New estimate		Change* (bps)
		FY23	FY24	FY23	FY24
SBI	Net profit	₹48,900cr	₹51,600cr	870	180
Bank of Baroda		₹13,900cr	₹14,600cr	2600	3300
SBI	NII	₹1,44,500cr	₹1,62,400cr	250	330
Bank of Baroda		₹42,500cr	₹47,700cr	1000	1200
SBI	Loan growth	18%	15%	448	250
Bank of Baroda		16%	13%	100	100

Source: HSBC Global Research | *Change as compared to the previous estimate

Brokerages have also upgraded their target prices for State Bank of India, with the upside now in the range of 11-26% compared to the current market price of ₹613 (November 9).

Brokerage	Target price	Upside
Goldman Sachs	₹770	26%
Jefferies	₹760	24%
Morgan Stanley	₹715	17%
HSBC	₹710	16%
ICICI Direct	₹700	14%
HDFC Securities	₹700	14%
Credit Suisse	₹680	11%

Analysts flag impending headwinds

Banks are now competing to capture deposits by hiking interest rates – according to the Reserve Bank of India, deposit rates rose 10 basis points in October 2022, taking the cumulative increase to 30-35 bps.

Earlier, Kotak Mahindra Bank’s CEO and MD Uday Kotak said that the bank had witnessed some customers moving away from savings deposits to other instruments offering higher interest rates.

Analysts suggest caution due to the rising competition among banks to attract deposits. “Net interest margin on the retail book will likely stay supported by the recent hike in benchmark rate, but increased competition and higher deposit rates are a concern,” said a report by Kotak Institutional Equities.

“Whilst this was no doubt a bumper quarter, we flag impending headwinds in terms of softer loan growth, and catch-up on deposit mobilisation and deposit pricing,” said a report by HDFC Securities, adding that tightening liquidity impedes any material upgrade in its forecasts for State Bank of India.


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