Kotak Equities downgrades two PSU banks after swift re-rating in valuations

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In its report, Kotak has maintained that tier-2 have seen a sharp valuation re-rating over the past two years, resulting in a swift convergence in the valuations of all PSU banks closer to . As a result, making an investment case for tier-2 PSU banks has become challenging given that (SBI) has demonstrated a superior franchise across all key metrics through-the-cycle credit cost, liability franchise and asset franchise.

However, Kotak has clarified that the current benign credit environment has supported asset quality for PSU banks and early warning indicators gives it no reason to worry.

Kotak has retained an 'Add' rating on BoB and Union Bank while asserting that it prefers SBI among PSU banks.

Kotak is of the view that tier-2 PSU banks will likely witness a meaningful decline in credit cost in FY2025E holding steady resolution of stress from the corporate NPA cycle as a primary reason for significant improvement in asset quality for PSU banks over the past few years.

These banks have also been able to limit the impact from the Covid pandemic, contrary to expectations of many. Slippages have declined across most segments for all PSU banks and early warning indicators are benign as well.

It values SBI at 1.4X FY2026E BVPS (adjusted) while BoB at 1.1X. As for Canara Bank, Union Bank and PNB, it is 1X FY2026E BVPS (adjusted).

Canara Bank was the only PSU bank stock trading in the green on Thursday in the Nifty PSU Bank index which was down nearly 1% at 6,776.10 around 11 am. While SBI was down by 0.34% around this time PNB, BoB and Union Bank were down up to 1.65%.

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