In recent times, the Indian stock market has witnessed an interesting trend where Government Banks (PSBs) are outperforming private sector banks. This is a significant shift, as traditionally, private banks were considered more attractive investment options.
So, what has happened in recent years that has led to PSU banks providing better returns to investors? If you are wondering whether this trend can continue, let’s explore it in detail.
What’s Happening?
For Government Banks (PSBs), the recent times have been quite remarkable. In the past month, the Nifty PSU Bank index has delivered a fantastic performance of 8.5%, surpassing both private banks and the Nifty 50 index. Moreover, even over the past year, shares of public sector banks have outperformed those of private sector banks.
Due to this stellar performance, the valuation gap between the two has significantly reduced, prompting analysts to reconsider their ratings for both.
However, while there are several factors contributing to the rally in PSU banks, are all these factors sufficient to sustain this momentum? Let’s discuss these questions further!
Reduction in Bad Loans: PSU banks have experienced a significant reduction in bad loans, indicating an improvement in their asset quality. According to Money Control, as of December 2023, the average bad loan ratio for 14 listed PSU banks was 4.2%, while for 16 listed private sector banks, it was 3.0%.
Improved Earnings: Reduced bad loans and other factors have led to a considerable improvement in the earnings of PSU banks.
Low Valuation: PSU bank shares were trading at considerably lower valuations in the past, providing investors with buying opportunities. While shares of private banks were already trading at high valuations, making PSU bank shares appear cheaper in comparison.
Performance of Government and Private Banks
Talking about this year, the Nifty Private Bank index is down by about 5%, while the Nifty PSU Bank index has delivered returns of around 20%. This trend of excellent performance is not just limited to this year but has been observed over the last three years as well.
Let’s understand how PSU banks have performed compared to private banks with the help of the table below:
What Does it Mean for Investors?
According to The Times of India, from a valuation perspective, PSU bank shares were trading at a good valuation compared to private bank shares previously. This can be understood from the fact that the PB ratio of private banks was between 2.5 and 2.8, while for PSU banks, it was quite low, ranging from 0.4 to 0.6.
However, things are changing now. Currently, the valuation of private banks is in the range of 2 to 2.4 PB ratio, while the valuation of PSU bank shares has increased to an average of 1 to 1.3 PB ratio. This means that currently, PSU stocks are at a better valuation compared to private bank stocks.
What’s Next?
Recently, a brokerage firm named Bernstein has given a ‘Market Perform’ rating to the shares of the State Bank of India (SBI). This implies that the firm does not expect significant improvement in the shares of State Bank in the future. However, they have raised the target price from Rs 710 to Rs 780, appreciating the bank’s efforts in capital improvement.
Moreover, Bernstein has also mentioned the lagging behind of government banks compared to private banks. While government banks have shown good performance over the past three years, weak deposit growth and lower liquidity buffers may hinder their earnings growth in the future. Overall, Bernstein believes that investing in private banks could prove to be more beneficial.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
