PSU Bank Profitability: Recovery Focus & Top Picks by YES Securities

YES Securities recently evaluated eight prominent Public Sector Undertaking (PSU) banks, assessing how their profitability relies on recoveries from written-off accounts and the existing pool of such assets. The analysis highlighted significant variations in this dependence across different lenders, influencing their financial outlook.

Profitability Dependence Varies

The report indicated that State Bank of India (SBI) and Bank of Baroda (BoB) showed low absolute dependence of return on assets (RoA) on these recoveries, registering 0.1% and 0.2% of average assets, respectively. In contrast, Punjab National Bank (PNB), Canara Bank, and Bank of Maharashtra (BoM) exhibited higher dependence, with figures of 0.3%, 0.3%, and 0.4%, respectively, underscoring the need for differentiated assessment among PSU banks.

Bank of Maharashtra appears well-positioned, boasting a larger RoA buffer. Its pre-tax recovery from written-off accounts as a proportion of profit before tax stood as the fourth lowest among the eight banks at 24.5%. SBI, BoB, and Indian Bank recorded even lower ratios, demonstrating stronger underlying profitability.

Without these recoveries, BoM’s FY26 RoA is projected to remain at 1.4%, while SBI and Indian Bank would achieve close to 1%, and BoB around 0.9%. Other banks, including PNB, Bank of India, and Canara Bank, would experience materially lower RoAs under such a scenario.

Written-Off Accounts Persist

YES Securities noted that the total volume of written-off accounts remains substantial for most PSU banks, ranging from 6.4% to 7.4% of their total loan books by the end of FY26. SBI was an exception, with its proportion at 3.3%, indicating a comparatively healthier balance sheet.

Recoveries from these accounts in FY26 constituted between 5.3% and 11.1% of opening balances, suggesting the residual pool will take years to diminish. This extended timeline offers banks an ongoing opportunity to offset potential erosion through gradual enhancements in Net Interest Margin (NIM), fee income, and stringent operational expenditure control.

Top Investment Picks

In terms of stock preferences within the PSU banking sector, YES Securities recommended Bank of Baroda with a target price of Rs 375, State Bank of India at Rs 1,400, Bank of Maharashtra at Rs 105, and Indian Bank at Rs 1,125. These were identified as the only PSU banks warranting investment, in that specific order.

Broader banking sector preferences included Bank of Baroda, HDFC Bank Ltd (Target Price: Rs 1,075), Axis Bank Ltd (Target Price: Rs 1,1715), Kotak Mahindra Bank Ltd (Target Price: Rs 525), ICICI Bank (Target Price: Rs 1,850), and State Bank of India. Bank of Maharashtra was designated as the preferred midcap bank, and DCB Bank (Target Price: Rs 240) as the preferred smallcap bank.

Conversely, RBL Bank Ltd (Target Price: Rs 430) and IDFC First Bank Ltd (Target Price: Rs 95) were least preferred by the analysts. YES Securities maintains a ‘buy’ rating on all recommended stocks, with ‘add’ ratings assigned to RBL Bank and IDFC First Bank.