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Recent market dynamics have seen a notable trend emerge, with Government Banks (PSBs) in India outshining their private sector counterparts in stock market performance. This deviation from traditional expectations begs the question: What factors are driving this surge, and can it be sustained?
In a remarkable display, the Nifty PSU Bank index has surged by an impressive 8.5% in the past month, surpassing not only private banks but also the broader Nifty 50 index. Over the preceding year, shares of public sector banks have consistently outpaced those of private banks, marking a significant shift in market sentiment.
Several factors contribute to the resurgence of PSU bank shares including reduction in bad loans, improved earnings and low valuation.
PSU banks have witnessed a substantial decrease in non-performing assets, signaling an enhancement in asset quality.
Bolstered by reduced bad loans and other favourable conditions, PSU banks have reported significant improvements in earnings.
Historically, PSU bank shares traded at lower valuations compared to their private counterparts, presenting investors with attractive buying opportunities.
From a valuation perspective, PSU bank shares previously offered favourable ratios compared to private banks. However, with changing dynamics, the valuation gap has narrowed. Currently, PSU stocks are perceived to be at a better valuation compared to private bank stocks.
| PSU banks have witnessed a substantial decrease in non-performing assets, signaling an enhancement in asset quality. |
What brokerages say
“PSBs have hit the purple patch, given their decent LDR/LCR, as they have been prudent in this cycle – sacrificing growth for profitability, improving corporate asset quality, stable & better management profile, and ability to raise growth capital without diluting the BV much. Additionally, higher share of the MCLR book would ease the margin contraction trajectory once the rate reversal cycle begins, which coupled with healthy treasury gains should lead to better profitability,” Emkay said in a report.
However, slower branch expansion in the past few years due to asset-quality issues and merger pangs could once again accelerate the deposit market share fall and, thus, the economics of lending in the long run for PSBs, as they too will increase reliance on retail loans for growth. “For PVBs, we believe the credit growth slowdown could be more pronounced in the near term, given rising retail asset-quality risk and higher LDR/lower LCR,” it said.
However, PVBs (except KMB) are going the whole hog to accelerate retail branch franchisee (including the business correspondent model + partnerships) from a long-term perspective, though it might slightly hurt near-term profitability due to higher opex, it said. “Our preferred picks among PSBs are SBI, BOB, Indian Bank,
and Canara Bank. Among PVBs, we prefer ICICIB, Axis, HDFCB and IIB, given their healthy liability/asset-quality profile, better provision/capital buffers and reasonable valuations,” the Emkay report said.
| Private sector banks are going the whole hog to accelerate retail branch franchisee from a long-term perspective. |
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