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MOSL: Morning India (22/November/21): 1. Financials (PSBs: Light at the end of the tunnel!); 2. Wipro; 3. Laurus Labs; 4. Escorts

MOrning India (22/November/21): 1. Financials (PSBs: Light at the end of the tunnel!); 2. Wipro; 3. Laurus Labs; 4. Escorts

 

 

Today’s top research idea

Financials | PSBs: Light at the end of the tunnel!

• The asset quality outlook for PSBs is improving gradually after a prolonged corporate NPL cycle - GNPA ratios had reached the peak of ~15% in FY18. a) Government initiatives to boost manufacturing; b) rising commodity prices; c) deleveraging by large corporates; and d) balance sheet cleanup, along with the increasing pace of stressed asset resolution, have resulted in GNPA ratios moderating to ~9.5% as of FY21.
• SMA books across banks saw moderation of 19-120bp in 2QFY22 and stand at 0.3-2% of loans (barring INBK at 6.4%). This augurs well for incremental slippage to remain controlled. Thus, we estimate the slippage ratios of the Top 7 PSBs to moderate to 1.5-2.5% by FY24E v/s 2.5-7% in FY21.
• Therefore, PSBs are well-placed to deliver a strong rebound in earnings as we estimate FY22E PAT to be ~11x of the sum of FY17-21 PAT (25% CAGR over FY22-24E) and estimate RoA/RoE to improve to 0.8%/13.2% for FY24E. The current valuations of PSBs (barring SBIN) at 0.5-0.7x FY23E P/ABV do not fully price in the forthcoming RoE recovery as we estimate a 13-21% ABV CAGR over FY21-24E. SBIN, BoB, and UNBK are our top ideas.