At a time when most investors are cautious in investing in shares of state-run banks on concerns over asset quality and higher provisioning needs, brokerage Edelweiss Securities feels that it is a good time to buy these stocks now as the valuations do not reflect the likely improvement in their financial positions in coming quarters.
The brokerage has upgraded its rating on five public sector banks. It recommends its clients to "buy" shares of State Bank of India, Bank of Baroda and Union Bank of India and has turned "neutral" on Punjab National Bank and Allahabad Bank.
While shares of state-run banks have gained in the past one month in line with the broader market, the stocks have still underperformed by about 10 per cent for the year compared to the sector benchmark index Bankex.
"After carrying an underweight stance on state-owned banks for about two years on weak macro-economic outlook, we are now turning positive on them. Key rationale is the turn in macro fundamentals – pointing to a turn in cycle of interest rates... Is the euphoria already in the price? We don't think so," Nilesh Parikh analyst with Edelweiss Securities wrote in his note to clients.
The brokerage said that public sector banks typically outperform the broader market when the gross domestic product (GDP) is on an upward trajectory, benchmark rate cut is imminent and yields on government securities moderate.
With interest rates expected to come down, Edelweiss is also hopeful that GDP growth will recover from 2013-14.
While it has not revised its earnings estimates of state run banks for the current financial year, it sees upside on its 2013-14 earnings outlook on account of lower provisions and higher credit growth.
