The previous quarter was an exciting one for public sector banks (PSBs), compared with their private sector peers.
The Nifty PSU Bank index was up 14.99% – over 5% higher than the Nifty Private Bank index (9.8%). The fortunes changed after May 8, when the index had hit a recent low of 6,168.45.
Anand Dama, head of BFSI research at Emkay Global Financial Services, said the recent outperformance in public sector banks over the private ones was due to an overall better show in terms of lower margin compression, treasury gains and lower operational costs, among others.
While he expects stock prices of private banks to consolidate and correct for some time, PSB stocks like SBI, Indian Bank, Punjab National Bank and Canara Bank can rally 15-20% in the next six months.
Krishnan VR, head of quantitative research at Marcellus Investment Manager, explained that public sector banks are basically a leverage play on the non-performing assets cycle. Recently-relaxed project financing norms, large investment books and mark-to-market gains after interest rate cuts will help them deliver higher-than-estimated earnings. However, he noted that Marcellus prefers private banks due to the governance structure.
According to a Motilal Oswal report, within BFSI, PSBs led the aggregate earnings while private banks dragged for the quarter ended March.
Overall, the Nifty Bank index has gained 12.53% on a year-to-date basis. Last year, the Nifty PSU Bank index ended 14.5% higher when the gauge for private banks fell 0.38%.
Experts believe that the sharp rally in PSBs over the last four-five years was due to depressed valuations in the segment in 2019 and 2020 when there was a mini non-performing assets crisis. In the past three years, the Nifty PSU Bank index has risen by over 200% due to a recovery from higher NPAs and less incremental build-up.