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Business News/ Industry / Banking/  Why PSU banks are on a roll, explained in charts

Why PSU banks are on a roll, explained in charts

PSU Banks have outperformed private banks on stock market, despite losing market share to them. Lower valuations and government investments are helping.

On the day of election result, while the benchmark Nifty 50 fell 5.9%, the Nifty Private Bank index dropped about 7% and the Nifty PSU Bank index slumped approximately 15%. (File Photo: Mint)
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In the recent Lok Sabha election, the Bharatiya Janata Party (BJP) failed to secure a majority on its own, contrary to pre-poll predictions. It created uncertainty, as it would now have to rely on its alliance partners. This uncertainty hit bank stocks, particularly state-owned, or PSU, banks, which saw sharper declines than the broader stock market on the day of the results. While the benchmark Nifty 50 fell 5.9%, the Nifty Private Bank index dropped about 7% and the Nifty PSU Bank index slumped approximately 15%. Although these indices have since recovered, the plunge and subsequent rebound highlight the transformative changes public sector banks have undergone in recent years, thanks primarily due to government decisions.

In the recent Lok Sabha election, the Bharatiya Janata Party (BJP) failed to secure a majority on its own, contrary to pre-poll predictions. It created uncertainty, as it would now have to rely on its alliance partners. This uncertainty hit bank stocks, particularly state-owned, or PSU, banks, which saw sharper declines than the broader stock market on the day of the results. While the benchmark Nifty 50 fell 5.9%, the Nifty Private Bank index dropped about 7% and the Nifty PSU Bank index slumped approximately 15%. Although these indices have since recovered, the plunge and subsequent rebound highlight the transformative changes public sector banks have undergone in recent years, thanks primarily due to government decisions.

Read This: Banks had a blockbuster quarter. But don’t let that fool you

These decisions, particularly those addressing bad loans, have boosted the profitability of public sector banks. The combined net profit of the 12 PSU banks crossed 1.4 trillion in 2023-24, up 35% from the previous fiscal, and up four times compared to 2020-21, reflecting a turnaround in this segment. In 2020-21, for instance, Central Bank of India, and Punjab and Sind Bank reported losses. In 2023-24, they reported a net profit of 2,549 crore and 595 crore, respectively.

Read This: Banks had a blockbuster quarter. But don’t let that fool you

These decisions, particularly those addressing bad loans, have boosted the profitability of public sector banks. The combined net profit of the 12 PSU banks crossed 1.4 trillion in 2023-24, up 35% from the previous fiscal, and up four times compared to 2020-21, reflecting a turnaround in this segment. In 2020-21, for instance, Central Bank of India, and Punjab and Sind Bank reported losses. In 2023-24, they reported a net profit of 2,549 crore and 595 crore, respectively.

Second- and third-tier PSU banks are increasingly contributing to the sector’s profits. The share of State Bank of India (SBI), the leading PSU bank, in the total net profit of PSU banks has dropped from 64% in 2020-21 to 43% in 2023-24, indicating a broader turnaround. Consequently, the Nifty PSU Bank Index has surged over 83% in the past year, compared to a 9% rise in the Nifty Private Bank Index and a 22% increase in the BSE Sensex.

Credit quality

One reason why the market has rewarded PSU banks is their successful tackling of asset quality issues. With support from initiatives like the National Asset Reconstruction Co. Ltd (NARCL), a bad loans bank, and the insolvency and bankruptcy law, they were able to move bad loans off their books and improve recovery rates. For example, in the first 11 months of 2023, 10 PSU banks transferred 11,617 crore of bad loans to NARCL, according to the finance ministry.

PSU banks reduced their net NPAs by over 50,000 crore in 2022-23 compared to 2021-22, the Reserve Bank of India had said in a report in December 2023. This trend has continued, with net bad loans at SBI dropping to 0.57% of advances in March 2024, down from 0.67% in March 2023 and 2.23% in March 2020. However, despite improvements in their loan books, PSU banks have been losing market share to private banks. While their total credit outstanding expanded by over 50% between March 2019 and March 2024, their share of the market dropped from 58.9% to 51.8%.

Retail wars

The trend in deposit mobilization is similar. Total deposits with PSU banks grew by over 50% between March 2019 and March 2024, yet their market share declined from 63% to 57% during this period. To improve profitability, PSU banks have been aggressively pursuing low-cost deposits through current and savings accounts. These deposits grew by 48% during the period, but their proportion of total deposits decreased.

Mobilizing low-cost deposits often correlates with retail loans, as the target customer segments overlap. PSU banks have been trying to increase their presence in credit cards, which have seen a resurgence in recent years, but they still lag private banks. According to a recent report by IDBI Capital, total credit card spending at private banks grew 20.5% year-on-year this April, while PSU banks saw this segment grow by just 5.9%, despite a lower base.

Valuation game

Part of the reason why PSU bank stocks have outperformed their private peers, despite certain drawbacks, is their historically lower valuations. Even now, the price-to-earnings (PE) ratio of three of the top five PSU banks by market capitalization is lower than that of the top five private banks.

At higher valuations, PSU bank stocks might become unattractive to some investors, including mutual funds, which could exert pressure. The significant drop on election results day also underscored the dependence of PSU banks on the government. In a February report, Ambit Capital highlighted that PSU banks are natural partners for government investments, noting, "Capex-led loan disbursements are generally routed via PSUs lending money to the government for capital spending."

Some concerns that investors had about the stability of the BJP-led National Democratic Alliance government may have diminished. The Sensex has surpassed the exit poll results high, reflecting renewed optimism that could benefit PSU banks as well.

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