After runaway rally, shift from PSBS to private peers
Margin woes, increase in deposit rates may hamper further progress of public bank stocks, say analysts
Investorsshouldstartpartiallybooking profits in shares of public sector banks (PSBS), as state-owned lenders could see margin concerns in the coming quarters according to analysts.
Cleaned up balance sheets and moderation in non-performing assets (NPAS) provide comfort in the PSB pack. But analysts believe increased deposit rates, amid monetary policy tightening by the Reserve Bank of India (RBI), may eat into their profit margins going ahead.
“The poor performance of PSBS over the past decade has led to under-ownership of entities by high net-worth individuals (HNIS) and institutional investors. Going forward, the pack may continue to do well for a couple of quarters. However, their net interest margins (NIMS) may come under pressure due to rising deposit rates,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services. The Nifty PSU Bank index has vaulted 70 per cent from its June low. It sharply outperformed the Nifty50 index (up 21 per cent), and the Nifty Private Bank index (up 33 per cent) during the period, ACE Equity data shows.
Among individual stocks, shares of Union Bank of India, Bank of India, UCO Bank, and Punjab National Bank have surged between 81 per cent and 133.5 per cent during the period. Sector giant State Bank of India (SBI) has soared 38 per cent.
Their private counterparts, meanwhile, have rallied in the range of 15-46 per cent. The relative outperformance of PSBS over private banks got a fresh leg up after the former’s July-september quarterly (Q2 of FY23) performance.
On an aggregate basis, PSU lenders posted an improvement in operating performance, led by a robust pick-up in loan growth (3-8 per cent quarter-on-quarter).
They were also aided by a sharp recovery in the corporate segment. Deposits saw a modest growth in the range of 0.5 per cent to 6.8 per cent. Net interest income (NII) saw a healthy growth with margin expanding up to 31 basis points (bps).
Healthy recoveries resulted in 39-177 bps quarter-on-quarter (QOQ) improvement in gross non-performing asset (GNPA) ratios across the board. In comparison, private banks posted a sequential uptick of 2-6 per cent in credit growth, barring Bandhan Bank. Average deposit growth came in at 5 per cent QOQ. As growth prospects of PSBS are fully priced in by the markets, independent market analyst Ambareesh Baliga suggests investors should start taking profit off the table.
“With this sharp rally, PSBS are fully factoring the growth prospects. Investors should look at booking out now as both private and public banks will be available at lower levels for fresh investments,” he says.
Furthermore, PSBS are now trading near their historical price-to-book (P/B) valuation multiple, leaving little room for upside. “PSBS have attained their fair value as they are trading near their historical adjusted P/B ratio of 1x. There is not more than 5-10 per cent upside left in PSBS; the shares can correct 10-15 per cent, going ahead,” said G Chokkalingam, founder and chief investment officer (CIO) at Equinomics Research. The P/B multiple of eight of the 12 Nifty PSB constituents, including Indian Overseas Bank, SBI, Bank of Maharashtra, and Bank of Baroda, is between 0.9x and 2x. For the remaining four, it ranges from 0.64x to 0.85x, data shows.
In comparison, the P/B for private banks is between 0.5x (Dhanlaxmi Bank) and 5x (Kotak Mahindra Bank). It is 4.35x for Nifty50, and 2.83x for Nifty Bank index.
Vijayakumar, however, said it makes sense to remain invested in only top twothree public sector lenders. And, private banks are better bets for long-term wealth creation. “While I am bullish on the banking sector as a whole, it makes sense to shift to private sector banks from public sector banks. The credit growth is at a record high of 15 per cent, which will continue in 2023.
However, private lenders hold a bigger market share in aggregate credit demand. Thus, their outlook is brighter on a relative basis. Also, the sector will outperform benchmark indices from a 6-12 month perspective,” Chokkalingam added.