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Edelweiss Financial Services' equity research wing is bullish on public sector banks despite the segment being largely shunned on account of concerns over bad debt. They believe that a significant margin of safety now exists, especially with moves towards improving governance standards at the bank.
"Look at it this way: Your liabilities have an implicit government guarantee and your assets’ pricing will now truly reflect economic cost and risk," stated the note attached to a report authored by analyst Kapil Gupta of the Edelweiss Strategy Team.
The company believes that a structural change is in the offing for public sector banks, which will help even as earnings too are beginning to recover. This is expected to act as a tailwind even as the cyclical earnings recovery story plays out. They believe the banking sector on a whole will see 18% growth in earnings.
"We believe markets are consistently ignoring several steps taken to institutionalise the governance structure (BBB board, professional CEO search, selective capitalisation, wage negotiation results, etc) as also the expected cyclical recovery in earnings," the note futher stated.
The note warned, however, that this may not immediately play out. They believe that while there may be some near-term underperformance, things are likely to look up in the longer term.
