Top 2 PSU Banks with Reasonable Valuations

The results of public sector banks (PSBs) in the December 2023 quarter were keenly awaited with investors trying to understand how these banks are dealing with a rising interest rate environment.

Union Bank of India and Canara Bank reported their quarterly results earlier this week with a key metric, net interest margins (NIMs), broadly flat on a YoY basis.

Union Bank Q3 Results

In the case of Union Bank of India, it reported NIMs of 3.08% in the December 2023 quarter vis-a-vis 3.18% in the September 2023 quarter and 3.21% a year earlier.

The bank reported a nearly 60% YoY rise in its standalone net profit to Rs 35.9 billion (bn) in the December 2023 quarter helped by a nearly 43% YoY decline in its provisions and contingencies to Rs 17.5 bn.

Its net interest income (NII) grew 6.3% YoY in the third quarter of FY24.

The bank's asset quality also improved - its percentage of net NPAs was 1.08% in the third quarter of FY24 vis-a-vis 2.14% a year earlier.

Union Bank of India had reported a 90.1% growth in its net profit to Rs 35.1 bn in the September 2023 quarter.

Canara Bank Q3 Results

Canara Bank reported NIMs of 3.03% in the third quarter of FY24, broadly flat on a YoY and sequential basis.

The bank posted a nearly 27% YoY rise in its standalone net profit to Rs 36.6 bn in the December 2023 quarter helped by a 9.5% YoY growth in its NII.

Asset quality of the bank was also good. The percentage of net non-performing assets was 1.32% in the third quarter of FY24 vis-a-vis 1.96% a year earlier.

Growth Outlook

The demand for loans is expected to remain strong going for banks with the economy expected to grow more than 6.5% over the next few years.

However, the ability for banks like Union Bank of India and Canara Bank to manage their NIMs would be key, given that the rate easing cycle is still 6-9 months away.

Earlier, the largest private sector bank HDFC Bank witnessed heavy selling pressure following the declaration of its third quarter FY24 results with investors disappointed with its NIMs.

Union Bank of India hit a 52-week high of Rs 145.3 on 20 January 2024 and it ended Thursday's trade declining 1.75% at Rs 140.4.

Meanwhile, Canara Bank hit a 52-week high of Rs 484.9 on 23 January 2024 and it ended Thursday's trade 2.4% higher at Rs 465.2

Union Bank of India trades at a reasonable P/E of 7.5 times estimated standalone FY24 earnings while it is 6 times for Canara Bank.

In contrast, ICICI Bank trades at a PE of more than 17 times estimated standalone FY24 earnings.

Here's a table comparing these banks on other metrics.

Comparative Analysis

Company	Canara Bank	Union Bank	SBI	Bank of Baroda
ROE (%)	16.4	12.2	18.4	14.9
ROCE (%)	14.8	13	12.5	13.3
Latest EPS (Rs)	80.8	17.9	76.4	35.6
TTM PE (x)	5.6	7.8	8.1	6.4
TTM Price to book (x)	1.1	1.2	1.5	1.1
Dividend yield (%)	2.6	2.1	1.8	2.4
Industry PE	9.2
Industry PB	1.4

Data Source: Ace Equity

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