Morgan Stanley upgrades PNB, BoB; SBI remains top pick!

Last updated: 04 Mar, 2021 | 01:26 pm

Morgan Stanley upgrades PNB, BoB; SBI remains top pick!
  • Morgan Stanley has upgraded the share price target of PSU bank stocks Punjab National Bank and Bank of Baroda on the back of improving balance sheets and capital ratios.
  • The foreign brokerage has noted that valuations of PSU banks are cheap at 0.4-0.5 times expected FY22 book value. However, the upside for most of them is limited as not all of them will benefit equally from the corporate recovery cycle.

View on the stocks


  • SBI remains the global brokerage firm’s top pick. Morgan Stanley has retained an Overweight rating on the stock with a target price of Rs 600. 
  • While there could be short term upside for PSU bank stocks, Morgan Stanley prefers SBI to play out the corporate recovery cycle. At other banks barring SBI, there are structural challenges which will keep return ratios muted, limiting any significant rerating potential beyond the short cyclical upswing, noted Morgan Stanley.

Bank of Baroda

  • Morgan Stanley has upgraded the rating to ‘Equalweight’ with a target price of Rs 100 from Rs 65 earlier. 
  • The firm noted that the Balance sheet has improved over the last few quarters. Capital ratios and underwriting practices have improved. It expects lower slippages, higher rates and lower opex to drive recovery in pre-provisioning operating profit ( PPoP) margins.
  • However, Covid-related impairments and elevated exposure to stressed segments could keep credit costs elevated in the near term. Valuations against this backdrop are fair.

Punjab National Bank

  • The rating has been upgraded to Equalweight from Underweight earlier with a target price of Rs 48, as compared to Rs 35 earlier. 
  • Morgan Stanley noted that PNB has seen strong improvement in its balance sheet over the last few quarters. The Coverage on impaired loans has gone up.
  • PPoP margins are expected to improve gradually, helped by lower slippages and operating expenses. Normalisation of credit costs will not happen before FY23.

Common highlights for all PSU banks

  • Excluding SBI, the Common Equity Tier-1 ratio for Morgan Stanley’s coverage universe of PSU banks has improved to 9.6% versus 9.1% in FY20 and 6.8% in FY18.
  • Over the last few years, state-owned banks have seen a significant capital infusion by the government, lower RWA (risk weighted asset) density, higher provisioning and some large recoveries, said the report.
  • The gross non-performing loan ratio, too, has moderated and GNPL coverage has improved at state-owned banks over the past few quarters. Excluding SBI, GNPL coverage at such lenders has improved 20 percentage points since FY18 to 67%, and is about 55% on overall impaired loans.
  • However, a higher share of moratorium customers/stressed corporate exposure, and a materially lower collection efficiency than private banks imply continued elevated slippages/restructuring in upcoming quarters
  • Further, these PSU banks will continue to lose loan market share, given the technology changes, strong competition and a weak internal rate of capital generation.
  • Margin of safety, which refers to the potential bad loans absorption capability, remains low for PSU banks, which also doesn’t work in their favour. This will become problematic in case the macro recovery is softer than expected, said the firm.
  • Morgan Stanley remains underweight on Canara Bank and Bank of India given their lower profitability.

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