Brokerage Bank of America Merrill Lynch (BofA-ML) today turned positive on state-run banks' shares, including SBI, on expectation of a rate cut by RBI this month-end as well as better-than-expected loan recoveries.
"The upgrades come on the back of a steepening bond yield curve in the anticipation of Reserve Bank cutting rates later this month, stronger-than-expected loan recoveries, and reduced asset quality pressures on the state-run banks," it said in a report, 'Turning the corner on Government banks'.
The brokerage changed the status of SBI Bank of Baroda and Oriental Bank of Commerce to "buy" from "underperform".
The government banks, which underperformed private lenders by 30-50 per cent in 2012, may potentially offer 18-23 per cent upside in 2013, as the RBI begins to cut rates, said the report authored by the America brokerage's research analysts Rajeev Varma and Veekesh Gandhi.
While SBI is likely to offer an 18 per cent return this year, Indian Bank is set to lead the chart with a whopping 30 per cent return, followed by BoB and OBC, which are likely to offer 23 per cent each. Union Bank is expected to offer a 21 per cent return, said the report.
SBI jumped 1.07 per cent to Rs 2,493.45 after hitting a high of Rs 2,500, while BoB closed almost flat at Rs 881.50 on BSE today.
The news had no impact on ICICI Bank as it ended 0.2 per cent down at Rs 1,179.30 on a day when the benchmark Sensex gained 51 points, or 0.26 per cent.
"Private banks will likely continue to deliver structurally superior earnings and return on equities, especially over the medium term. We were positive on private banks, especially ICICI Bank, HDFC Bank and Yes Bank," the report said.
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BofA Merrill turns positive on Indian state-owned banks
Reuters: * Bank of America Merrill Lynch upgraded State Bank of India, Bank of Baroda, and Oriental Bank of Commerce Ltd to 'buy'.
* The investment bank says upgrades come on the back of a
steepening bond yield curve in the anticipation of RBI rate
cuts, stronger-than-expected loan recoveries, and reduced
* BofA Merrill also upgrades its price objectives for private
banks, retaining ICICI Bank Ltd as its top pick, and
HDFC Bank Ltd and Axis Bank Ltd as its
"preferred" names. All three banks have 'buy' ratings.
* "Private banks will likely continue to deliver structurally
superior earnings and RoEs, especially over the medium term,"
BofA Merrill says in a note dated Tuesday.