Mumbai: With state-run banks facing the brunt of mounting bad loans and frauds in some cases, and a few leading private banks grabbing headlines for the wrong reasons, small finance banks and select non-banking financial companies (NBFCs) have been grabbing investors’ eyeballs more than before.

The top losing financial stock is fraud-hit Punjab National Bank, which has eroded 48% in value year-to-date. Competitors Bank of India and Union Bank of India followed next, with declines of 41% and 39%, respectively. Clearly, state-run lenders have largely been off the radar of many investors.

However, in recent times, private banks such as ICICI Bank Ltd and Axis Bank Ltd have also been at the forefront of debates and investor angst, and have been bothered by alleged corporate governance and performance issues in their respective cases.

Year to date, while BSE’s Sensex and Bankex index have risen 4.40% and 3.06%, respectively, ICICI Bank and Axis Bank shares have shed 1.29% and 1.80%, respectively.

Their peers, HDFC Bank Ltd and Kotak Mahindra Bank Ltd, have gained 7.88% and 25.75%, respectively, since the start of 2018 and have been the favourites of investors for a while.

However, the problems of mounting bad loans and the alleged issues of corporate governance and performance, coupled with the cases of fraud that have hit state-run banks and some private banks have given other private financial services providers an opportunity to shine. And it looks like they are doing exactly that.

“Small finance banks are getting a lot of attention. Selective NBFCs are regaining interest. They are doing well. The performance has been good. There has been incremental interest in select private banks, which have been in favour for a while now," said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.

Further, there seems to be consensus that public sector banks (PSBs) are likely to stay out of favour despite the efforts to recapitalize them as, apart from the usual problems, they may also end up bearing the brunt of populism in the light of the upcoming general election.

“The BJP’s manifesto for Karnataka, released prior to the forthcoming election, includes the now-all-too-familiar agriculture loan waiver. The waiver would apply to loans of up to Rs1 lakh from nationalized banks and co-operatives," Kotak Institutional Equities said in a 6 May note.

“If the BJP does win, it would be a while before the details of any waivers are released or put into effect; meanwhile, the temptation to default is likely to be high. Public sector banks and MFIs (micro-finance institutions) are likely to bear the brunt of this impact," Kotak added.

Concerned about this, Kotak analysts have downgraded the Karnataka-focused Ujjivan Financial Services Ltd from add to reduce, adding that they see negligible upside in the stock.

Amid all this, the recently-listed Bandhan Bank is gaining huge investor interest despite lofty valuations.

“Bandhan’s profitability ratios are the best amongst Indian banks and we expect them to remain so over the medium term," JM Financial Institutional Securities Ltd, said in a 7 May report while initiating coverage with a buy rating on the stock.

In the note, JM analysts argued that while the recent large capital raise has driven a dip from historical high levels of 26-28% return on equities (RoEs), it also implies a high cushion in case of any systemic shocks.

The increasing interest is translating into higher market share for some of them.

“Well capitalized mid-sized private sector banks such as IndusInd Bank and Yes Bank are gaining market share at the expense of some PSBs that are not performing well. NBFCs have seen decent growth in the vehicle financing segment. In this quarter, disbursals of companies such as Cholamandalam Investment and Finance Co. Ltd have been strong, which is an indication that they are gaining market share," said Siddharth Purohit, an analyst at SMC Institutional Equities.

On a year-to-date basis, Cholamandalam Investment and Finance Co. Ltd is up nearly 22%.

Domestic brokerage Motilal Oswal Securities Ltd concurred. In its March quarter interim earnings review for fiscal year 2018, it pointed out that value migration is accelerating in favour of private financials.