PSBs stealing the limelight: Will the rally continue?
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!
Key Factors Driving the Rally in Govt Bank Shares PSU
Reduction in Bad Loans: 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 Govt 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.
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.
Teji Mandi (TM Investment Technologies Pvt Ltd) is a SEBI registered Research Analyst (RA). Information in this article should not be construed as investment advice. Please visit www.tejimandi.com to know more.