SBI vs Bank of Baroda: Which PSU bank stock should you pick for long term?

Over the past year, public sector banks (PSU banks) have demonstrated a remarkable performance, significantly outperforming other sectors. The Nifty PSU Bank index alone has delivered impressive returns of over 83 percent, overshadowing the 19.5 percent returns of the benchmark Nifty Bank index during the same period. This outperformance of PSU banks stands out even more prominently when compared to the Nifty50 index, which gained 30 percent over the same timeframe.

Despite the notable outperformance observed in the past 1 year and the sector's considerable re-rating, the valuations of PSU bank stocks continue to appear reasonable when considering business growth and profitability metrics.

“We believe that while NIMs may remain range-bound with a slight downward bias, the improvement in opex ratios, scope for further credit cost reduction (barring SBI), and a healthy treasury performance will enable the sector RoA to reach 1.2 percent by FY26E," brokerage house Motilal Oswal has said in a recent note. It added that considering the valuation history of PSU banks, their trading multiples may look constrained now. However, the quality of earnings, growth outlook, and broader re-rating in public sector enterprises will enable steady performance for the sector.

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Amid this environment, let's analyse between the State Bank of India (SBI) and Bank of Baroda (BoB), which PSU bank stock has better long-term investment opportunities.

Stock Price Trend

Both SBI and BoB have given double-digit returns this year so far but SBI has been the better performer. While SBI has risen almost 16 percent in 2024 YTD, BoB has advanced 12 percent in this period. In comparison, the Nifty Bank index has lost almost 3 percent and Nifty has added around 2 percent in this period.

This year so far, SBI has given negative returns in 2 and positive returns in just 1 month whereas BoB has been negative in one and positive in 2 months till date.

SBI has shed around 0.7 percent in March so far after a 16.6 percent surge in February. However, it was flat but in the red (down 0.08 percent) in January 2024. On the other hand, BoB has declined 2.7 percent in March till date after a 6.8 percent and 7.5 percent gain in February and January, respectively.

Read here: PSU banks’ valuations still reasonable despite sharp re-rating: Motilal Oswal

Meanwhile, in the last 1 year, BoB is the better stock. It has rallied over 62 percent whereas SBI has jumped over 43 percent. In comparison, Nifty Bank has added over 19 percent while Nifty is up over 26 percent.

Both SBI and BoB have also hit their record highs in the current month, March. SBI hit its new peak of ₹793.40 on March 7, 2024, rising over 58 percent from its 52-week low of ₹501.55, hit on March 27, 2023. Meanwhile, BoB also touched its all-time high of ₹285.60 on March 11, 2024, surging 83.5 percent from its 52-week low of ₹155.60, hit on March 16, 2023.

Moreover, in the long term, 3 years, BoB has emerged as the winner. The stock has given multibagger 228 percent returns whereas SBI is up just 93.5 percent.

Earnings

In the December quarter, SBI reported a 35 percent fall in its standalone net profit at ₹9,164 crore, weighed down by higher operating expenses, as compared to ₹14,205 crore in the year-ago period. The lender, in a press release, said that they had a one-time exceptional item of ₹7,100 crore.

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The net interest income (NII) of the country's largest bank fell slightly short of estimates, standing at ₹39,815 crore instead of the expected ₹40,304 crore. However, the net interest margin of the lender remained stable at 3.22 percent. Notably, the bank's gross non-performing assets (NPAs) decreased to 2.42 percent from 3.14 percent recorded in the corresponding quarter of the previous year. Moreover, the net NPAs for the quarter improved to 0.64 percent compared to 0.77 percent in the same period last year.

On the other hand, Bank of Baroda reported a 19 percent jump in its net profit to ₹4,579 crore during the quarter ending December 2023 as compared to ₹3,852.7 crore last year.

For the fiscal third quarter, the net interest income of the bank amounted to ₹11,101.3 crore, up from ₹10,818.3 crore reported for the same period last year. In terms of asset quality, the bank's gross non-performing assets (GNPAs), or gross bad loans, stood at 3.08 percent of total loans for the December quarter, marking an improvement from 3.32 percent recorded three months earlier. Additionally, the net non-performing assets (NNPAs), or net bad loans, showed improvement, declining to 0.70 percent from 0.76 percent in the previous quarter.

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Which PSU bank stock has better long-term investment opportunities?

Vijay Singh Gour, Senior Analyst - Choice Broking, prefers SBI over BoB.

SBI's loan book is expected to grow at a healthy pace driven by retail and SME portfolio. CD ratio of the bank would go up from the current level. It has one of the best CASA ratios which would support the margin profile of the bank when the industry is facing pressure on margins.

The asset quality of the bank has improved over the last couple of years and we expect further improvement in it. The restructured portfolio has improved and we expect further improvement in it. Overall, the return ratios of the bank are expected to be healthy in FY25 and FY26. The stock has given a sharp run up in the last couple of weeks. We have a positive outlook for the stock and investors should remain invested in it.

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities, also likes SBI better.

We prefer SBI for the longer term. The bank has shown remarkable improvement in asset quality. With no significant asset quality challenges, we expect asset quality to remain stable, thereby keeping credit costs under check. SBI also remains better positioned in terms of the C-D Ratio, and we expect the bank to maintain it around the RBI's comfort level of 75 percent. We expect the bank to maintain its growth momentum and deliver a healthy 14 percent CAGR loan growth over FY24-26E. SBI remains well placed to deliver a consistent RoA of 1 percent over the medium term.

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Vinit Bolinjkar, Head of Research, Ventura Securities, as well, has picked SBI.

SBI is definitely cheaper than Bank of Baroda and its subsidiaries which are growing faster and will enable sustained growth over the longer term. So we definitely like SBI over BOB.

Anirudh Garg, Partner and Fund Manager at Invasset, believes both PSU lenders cater to different market segments and have different strengths.

Choosing between SBI and Bank of Baroda for a long-term stock investment requires careful consideration of several factors, including financial performance, growth potential, risk profile, and market conditions, among others. Both are established players in the Indian banking sector, but they cater to different market segments and have different strengths.

State Bank of India (SBI), being the largest bank in India, has a vast network, diverse service offerings, and a large customer base. Its size and presence could be associated with stability and a potentially lower risk profile, which might be attractive to some long-term investors. The strong net profit and net interest income reported by SBI, coupled with significant loan growth, could be indicative of a robust financial position and operational efficiency.

Bank of Baroda, while smaller than SBI, has shown commendable growth rates in loans and deposits, with slightly better asset quality improvements. The bank's ability to increase its provision coverage ratio and its recent strong performance in deposit growth could suggest a focus on sustainable growth and financial health.

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The consensus among experts leans towards SBI due to its size, stability, improved asset quality, and growth prospects. However, individual investors should conduct thorough research and consider their investment objectives, risk tolerance, and market conditions before making investment decisions.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.