Private vs PSU Banks: What should you pick in the current market scenario? (2024)

In 2023 YTD, PSU banks have outperformed private banks with the Nifty PSU Bank index rising over 10 percent and the Nifty Private Bank index up around 3 percent. In comparison, the benchmark Nifty Bank was completely flat in this period, up 0.4 percent.

In the last 1 year as well, the trend was the same. The Nifty PSU Bank index surged over 45 percent whereas the Nifty Private Bank index advanced over 5 percent and Nifty Bank gained almost 9 percent.

Both indices recently hit their record high levels, in line with the benchmark indices. Nifty PSU Bank hit its all-time high of 5,396.85 on October 3, 2023. It has now soared 65 percent from its 52-week low of 3,276.10, hit on October 25, 2022.

Meanwhile, Nifty Private Bank hit its peak of 23,955.00 on September 15, 2023. It has now advanced 22 percent from its 52-week low of 19,592.90, hit on March 16, 2023.

Of the 10 months so far in 2023, Nifty PSU Bank has risen in 5 and declined in 5. It gained the most in September, up 17.7 percent and lost the most in February and October so far, down over 8 percent each.

Nifty Private Bank, on the other hand, has been in the green in 6 of the 10 months so far in 2023. It rose the most in April, up over 6 percent and shed the most in January, down 5 percent.

Stocks

On the Nifty PSU Bank index, of its 12 constituents, 11 have given positive returns in 2023 YTD while only 1 has been in the red - SBI, down 9 percent.

Indian Bank has rallied the most, almost 45 percent, followed by Central Bank of India, and Bank of Maharashtra, up over 36 percent each. Meanwhile, Punjab National Bank, Indian Overseas Bank, Union Bank of India, UCO Bank and Punjab & Sind Bank have also advanced between 15 and 25 percent.

On the other hand, in the Nifty Private Bank index, of its 10 constituents, 6 are in the green whereas 4 have given negative returns.

IDFC First Bank has soared the most, over 48 percent, followed by RBL Bank, up over 30 percent and IndusInd Bank, up over 17 percent. ICICI Bank, Axis Bank and Federal Bank have also added 3.8 percent, 3.3 percent and 2.8 percent, respectively, in 2023 YTD. However, City Union Bank has shed the most, down over 26 percent, followed by HDFC Bank (-7.5 percent), Bandhan Bank (-6.5 percent) and Kotak Bank (-4.3 percent).

So among private and PSU banks, which ones should investors focus on more and why? Let's find out.

Veer Trivedi, Research Analyst, SAMCO Securities, has picked private banks over PSU Banks.

The PSU banks had a solid run in the past six months on the back of a positive business environment for the power and infra segment where PSU banks have a bigger exposure. Going forward, as of now, the NIM of banks has peaked out and the credit costs bottomed, the factor that would now drive the stock price would be stable credit growth and controlled GNPA numbers, said Trivedi.

“Taking into consideration these factors, we continue to back the top private banks and believe upcoming turbulence, if any, would be least impacted. HDFC Bank and ICICI Bank are my top picks in the space and Federal Bank in the mid-bank category."

Ajit Kabi, Banking analyst at LKP Securities, also prefers private banks.

Private banks are well placed in terms of retail growth. There is strong demand witnessed in unsecured pockets and lower yield housing credit. Public banks are also not behind, the growth in the industry segment is gradually picking up. The asset quality of selective private as well as public banks remains robust. Nevertheless, public banks are trading at a lower valuation compared to private banks. Given robust underwriting, strong growth and healthy spread, private banks are likely to command a higher valuation, said Kabi.

“We believe, ICICI Bank, IndusInd Bank, CSB Bank, SBIN and BOB to outperform the market."

Vinit Bolinjkar, Head of Research, Ventura Securities, also likes private sector lenders.

“Although we are optimistic about the entire banking sector, our focus remains predominantly on private banks rather than PSBs," said Bolinjkar.

Despite recent gains, PSBs are still trading at a substantial discount of 20-30% compared to private sector banks. This difference in valuation is due to the slower pace of their financial recovery when compared to private sector banks, he said.

Among the top choices within the private banking realm include HDFC Bank, ICICI Bank, and IDFC First Bank. The sole PSB that they favor is State Bank of India, owing to its extensive network and diverse product offerings.

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital, also favours private banks.

“We prefer private banks over PSU banks as we continue to remain of the opinion that market share loss for PSU banks (in deposits as well as advances) will continue as private banks keep improving their presence in deeper geographies across India. Private banks are more equipped with digital technology to suit customer requirements across demographics and are able to manage steady profitability across cycles. HDFC and ICICI are our preferred bets along with Bajaj Finance. SBI is the only PSU bank we prefer," said Shial.

Meanwhile, Dnyanada Vaidya, Senior Research Analyst - BFSI, Axis Securities, is positive on the entire sector.

“We continue to remain positive in the sector. The credit growth momentum so far has remained healthy, and we expect a similar trend in H2FY24. No significant asset quality challenges are visible, which should keep credit costs steady. Even as pressure on margins will continue, we expect benign credit costs to support earnings for banks. We prefer ICICI Bank and Federal Bank among the private banks and SBI among the PSBs," said Vaidya.

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

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Published: 25 Oct 2023, 12:46 PM IST