Public sector banks that account for close to 70% of the Indian banking industry seem to be insulated from the recent market turmoil.
The 30-share Sensex of the Bombay Stock Exchange (BSE) lost 5.08% in the last one month, between 18 January and 18 February, but the public sector banks were relatively less affected, losing only 2.19% during the same period. In comparison, the stocks of Indian private sector banks lost more than 7%.
In fact, public sector banks have consistently outperformed their private sector counterparts over the past year, gaining more than 75% between February 2007 up to now. During this time, private sector banks have gained 48.36%, while the Sensex rose 25.31% and the BSE Bankex, an index of 18 listed banks, rose more than 50% in this period.
Among the public sector banks, State Bank of India (SBI) and Bank of India (BoI) have gained more than 100% in the past one year. Three other large banks in this pack—Punjab National Bank, Canara Bank and Bank of Baroda—have gained 32.85%, 39.85% and 88.23%, respectively. The stock of ICICI Bank Ltd, India’s largest private sector lender, during this time, rose 23.54%. Among other private banks, HDFC Bank Ltd rose 50.76% and Axis Bank Ltd 91.90%.
Overall, 40 banks are listed on Indian bourses and 22 of them are from the public sector. Kolkata-based United Bank of India and New Delhi-based Punjab and Sind Bank are the only two state-run banks that are not listed, in addition to a few SBI associates.
A recent Citigroup Inc. report on banking, published on 15 February, justifies the performance of state-run banks on bourses, saying their asset growth has been strong and manageable.
According to the report, the asset quality is “an area of caution” for private sector banks, but it has been improving for public sector ones. “Government banks have been recording minimal deterioration (in asset quality), with improving gross and net NPL (non-performing loans) percentages, while private banks have lagged,” it says.
R.K. Bakshi, general manager of Mumbai-based BoI, says public sector banks have “improved greatly” on areas such as asset quality, information technology initiatives and new products, and this is reflecting on their better balance sheets. In comparison, he says, there have been concerns among investors about the “sustainability of performance of private sector banks and their deteriorating asset quality”.
Analysts, however, offer different reasons for the relative better performance of public sector bank stocks. They are “cheap” while their sector peers are “expensive”.
Rajat Monga, chief financial officer at private sector Yes Bank Ltd, says private sector banks are a better buy at their current valuations. “There are fewer issues in private sector banks while state run banks have bigger things to tackle, be it consolidation or average age of employees,” Monga says. “Private sector banks are now deepening their presence in tier-II and tier-III cities, where public sector banks have scored over so far.”
Ashwin Ramarathinam contributed to this story.