Public Sector Banks - The Homecoming Of RoA: Motilal Oswal

Motilal Oswal Report

Public sector banks have come a long way over the past five years with profitability of top seven PSB’s under our coverage improving to an estimated Rs 909 billion in FY23 from a loss of Rs 594 billion in FY18. We estimate earnings traction to sustain aided by improved loan growth, margins and controlled credit costs.

While the return on asset mark of ~1% for a PSB appeared more like an aspiration until two years ago, we note that collectively the top seven PSBs under our coverage have delivered an average RoA of ~1.1% over 10 years during FY04-13.

Even the peak RoA witnessed over this decade across these PSBs stood healthy at 1.1%-1.7%. We note that for five years during FY16-20, Axis Bank Ltd. and ICICI Bank Ltd.’s average RoA stood at 0.6% and 0.9%, respectively.

Earnings quality for these PSBs have also improved sharply as our current RoA projections pencil in much lower contribution from treasury gains (average 12 bps to RoA) versus 47 bps average seen over FY04-13.

Moreover, we are also building in a slightly higher credit cost than that prevailed during those ten years, which underscores the ability of PSBs to sustain this earnings trajectory.

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