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Business News/ Markets / Stock Markets/  PSU Banks vs Private Banks: Here's what 5 experts have picked
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PSU Banks vs Private Banks: Here's what 5 experts have picked

Amid recent market movements, public-sector bank stocks have surged while private-sector banks have experienced a retreat, largely due to consolidation efforts. The Nifty Private Bank index has seen a decline of almost 7% YTD, in contrast to the significant over 17% surge in Nifty PSU Bank index.

Amid recent market movements, public-sector bank stocks have surged while private-sector banks have experienced a retreat, largely due to consolidation efforts. The Nifty Private Bank index has seen a decline of almost 7% YTD, in contrast to the significant over 17% surge in Nifty PSU Bank index. (Pixabay)Premium
Amid recent market movements, public-sector bank stocks have surged while private-sector banks have experienced a retreat, largely due to consolidation efforts. The Nifty Private Bank index has seen a decline of almost 7% YTD, in contrast to the significant over 17% surge in Nifty PSU Bank index. (Pixabay)

Amid recent market movements, public-sector bank stocks have surged while private-sector banks have experienced a retreat, largely due to consolidation efforts. The Nifty Private Bank index has seen a decline of almost 7 percent year-to-date (YTD), in contrast to the significant over 17 percent surge in the Nifty PSU Bank index. Notably, the benchmark Nifty Bank also faced a decline of around 4 percent, primarily driven by heavyweight private banks.

Meanwhile, in the last one year as well, the trend has been similar. The Nifty PSU Bank index has soared 82 percent while the Nifty Private Bank index has added 16 percent. In comparison, the Nifty Bank index is up over 17 percent in this period.

“Banks will choose better yield retail lending over tightly priced corporate loans to utilize the available liquidity at an optimum level. We believe RoA for private banks has peaked out, resulting in a consolidation phase for stock prices, which should stay till spread expansion materializes," said InCred Equities in a recent report.

Also Read: SBI vs Bank of Baroda: Which PSU bank stock should you pick for long term?

Constituents

In the Nifty Private Bank index, barring 1 stock - ICICI Bank, up 8.5 percent, all other constituents have given negative returns in 2024 YTD. Bandhan Bank and RBL Bank have shed the most, down over 20 percent followed by HDFC Bank, down over 15 percent. All other private sector lenders in the index also lost between 4.5 and 13 percent.

On the contrary, all constituents of the Nifty PSU Bank index have delivered positive returns this year so far. Indian Overseas Bank is the top gainer, up almost 34 percent followed by Punjab & Sind Bank, up 31.5 percent. All other PSU Banks in the index have also advanced between 8-30 percent each.

Public vs Private Banks: Which should you choose?

Experts suggest that public-sector banks are currently in a more favorable position compared to private banks. Moreover, they anticipate further consolidation in the private banking sector in the near term. This shift in market dynamics underscores the evolving landscape of the banking industry and highlights the importance of monitoring sectoral trends for investors and stakeholders alike.

Also Read: Elections 2024 sector picks: IT, Auto among top 5 picks for this season

Deepak Jasani Head of Retail Research likes PSU Banks better

Although PSU Banks have risen well lately, they still have a lot of catch-up to do vis-a-vis the private banks despite their drawbacks. Given the fact that PSU Banks are more comfortably placed as far as deposits are concerned (in the current tight liquidity situation) and the expectation that the asset quality across the sector may remain stable, PSU Banks may be able to give better returns than private banks over the next quarter.

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities also prefers PSU Banks

The PSU Banks have performed better than the private banks. Hence, the valuation gap between them has narrowed. We have preferred plays from both the private and PSU banking space. Amongst the private banks, we prefer ICICI Bank and HDFC Bank, while among the PSU Banks, we prefer SBI.

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital 

Selective banks like HDFC Bank in the private space and SBI in the PSU space remain our top picks given their attractive risk-reward position.

Also Read: Brokerages list 3 private banks to buy for potential upside of up to 47%

Vinit Bolinjkar, Head of Research, Ventura Securities also favours public banks over private ones

Recently PSU Banks saw some stellar growth versus private banks. While the trend is expected to continue in the short term we expect the recent outperformance of the Private Banks to continue given that bad news is overdone and NBFCs are getting the regulators flak. However, PSU Banks will definitely outperform over the longer term.

Following the trend, Anirudh Garg, Partner and Fund Manager at Invasset, as well, explains why PSU banks are a better choice right now

In the forthcoming election year, selecting PSU Banks (Public Sector Undertaking Banks) emerges as a strategic choice, supported by compelling factors driving sustained growth and earnings potential. Despite historical valuation constraints, PSU Banks exhibit promising trajectories, underpinned by improved loan growth, stable margins, and controlled credit costs. 

Forecasts indicate a remarkable earnings upgrade, with an estimated 24% earnings Compound Annual Growth Rate (CAGR) over FY23-26, outperforming private banks. The projected Return on Assets (RoA) of 1.2% in FY25 signals significant scope for continued earnings enhancement. Moreover, the evolving narrative on interest rates is expected to further bolster the sector's earnings and growth outlook.

PSU Banks enjoy a competitive edge over private peers, particularly in the prevailing rate environment, with Liquidity Coverage Ratios (LCR) comfortably surpassing regulatory requirements. Their robust distribution networks, coupled with advancing digital initiatives, position them favorably for sustained growth. Despite prevailing margin pressures, PSU Banks exhibit resilience, maintaining better margins through prudent loan repricing strategies.

Also Read: General Elections 2024: Market volatility expected around poll results, says study

Furthermore, efforts toward cost management, including recent wage negotiations and controlled cost ratios, are indicative of efficient operational practices. Asset quality concerns, exacerbated by COVID-19 stress, have gradually been alleviated, supported by enhanced underwriting practices and continued recovery efforts. With stress largely recognized and adequate capitalization levels, PSU Banks are poised to navigate future challenges while sustaining healthy loan growth and profitability. 

Therefore, in light of their compelling earnings potential, liquidity resilience, and improved asset quality, PSU Banks present a prudent investment choice for investors eyeing the election year's opportunities.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 19 Mar 2024, 12:54 PM IST
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