PSU banks are in a good position right now to outperform private banks - Santosh Joseph, CEO & Founder of Refolio Investments and Germinate Investor Services
Table Of Contents
Introduction
Importance of PSU Banks in the Indian Economy and Capital Market.
Section 1: The Rise of PSU Banks in 2024.
Section 2: Comparative Analysis of PSU and Private Banks in 2024.
Section 3: The Nifty Bank Index and Its Implications.
Section 4: Detailed Financial Analysis.
Section 5: Future Outlook and Conclusion.
Introduction
In the dynamic landscape of the Indian capital market, the Public Sector Banks (PSUs) have emerged as a beacon of resilience and growth, especially in early 2024. Amidst a backdrop of fluctuating economic indicators and challenges, the PSUs' upward trend signals a significant shift in investor confidence and market perception. This development not only underscores the pivotal role of these banks in stabilizing and fostering the country's economic environment but also marks a notable departure from the issues of fraudulent cases and management concerns that have shadowed the banking sector in recent times. As the cornerstone of the Indian financial ecosystem, PSUs are instrumental in driving financial inclusion, propelling infrastructure development, and supporting various government schemes, which in turn catalyzes economic growth and stability.
Importance of PSU Banks in the Indian Economy and Capital Market
PSU banks have the capital and capacity to lend, which is not available or very tough to find in other pockets of the market. This is one space where valuations still are way reasonable.- Sailesh Raj Bhan, CIO of Nippon India Mutual Fund
Public Sector Banks (PSUs) play a pivotal role in shaping the Indian economy and capital market, their importance highlighted through several key aspects:
Financial Inclusion: PSUs ensure banking services reach all segments of society, especially targeting the poor, the aged, and those in rural areas. This inclusivity promotes economic participation from all demographics.
Resource Mobilization: By extending their services to the remotest parts of India, PSUs are crucial in gathering savings and channeling them into productive uses across the economy, fostering growth and development.
Supporting Government Schemes: PSUs are instrumental in the implementation of various government schemes aimed at social welfare, economic development, and financial inclusion, serving as the government's banking arm.
Infrastructure Development: With a focus on infrastructure lending, PSUs contribute significantly to the country's development projects, thus driving overall economic progress.
Credit Risk Management: The improvement in asset quality and better capital adequacy ratios of PSUs enhance their ability to manage credit risks efficiently, ensuring a stable and resilient banking sector.
Investment Potential: The global recognition and inclusion of PSU banks in international bond indexes have reduced borrowing costs for India, showcasing their investment appeal and potential for easing borrowing pressures.
Government Capex Lending: Positioned at the forefront of government capital expenditure lending, PSU banks, with their cleaner balance sheets, are better equipped to support large-scale infrastructure and development projects.
As we delve into the intricacies of PSU banks’ resurgence, it's crucial to recognize their dual role in bolstering the economy and shaping the capital market landscape. With this article we aim to explore the factors driving the renewed confidence in PSU banks, analyze their current standing in the market, and forecast their potential impact on the Indian economy in the foreseeable future. Through a comprehensive analysis of financial ratios, market trends, and comparative studies with their private counterparts, we will uncover the essence of PSU banks' upward trend in the Indian capital market in early 2024.
Section 1: The Rise of PSU Banks in 2024
Canara Bank, Union Bank, Indian Bank, Bank of India, and Indian Overseas Bank could lead the next round of upside. - Anand James, Chief Market Strategist at Geojit Financial Services
Why is everybody talking about PSU banks in Indian Capital Market in 2024?
Public Sector Undertaking (PSU) banks have grabbed the spotlight in the Indian Capital Market in 2024 for several compelling reasons:
Significant Upward Movement: Experts predict a considerable rise in the value of PSU banks this year, with the State Bank of India leading the surge. The consensus is that investing in the State Bank of India at its current level is a wise decision.
Top PSU Bank Stocks: Key players include State Bank of India, Canara Bank, Bank of Baroda, Punjab National Bank, and Bank of Maharashtra, all of which have shown promising performance.
Expert Recommendations: Financial analysts recommend buying stocks of Union Bank of India, Canara Bank, SBI, PNB, and Bank of Baroda, indicating strong faith in their growth potential.
Market Capitalization: The State Bank of India stands out with a market capitalization reaching 5.64 lakh crore as of December 2023, showcasing its dominant position in the sector.
These factors, combined with a positive economic outlook, have heightened discussions and interest in PSU banks within the Indian Capital Market in 2024. However, it's important to note that the market is subject to rapid changes, and staying updated with the latest information is advisable.
Overview of PSU banks' performance and factors leading to their upward trend
The performance of PSU banks surpassing their private counterparts in early 2024 can be attributed to several key factors:
Improved Governance Standards: Enhanced management and operational efficiencies have been pivotal in improving PSU banks' performance.
Technological Advancements: Adoption of modern technologies has significantly bettered customer services and overall banking experiences.
Pre-Election Market Surge: Positive market reactions to recent elections to be held have contributed to the buoyancy in PSU bank stocks.
Potential Valuation Catch-Up: There's an ongoing trend where PSU banks are closing the valuation gap with their private peers.
Stable Asset Quality: The maintenance of stable asset quality stands as a testament to the robust health of PSU banks.
Attractive Return on Equity: PSU banks have been providing attractive returns on equity, a critical measure of financial performance.
Supportive Government Policies: Pro-PSU banking policies by the government have been a crucial support pillar.
Rising Capital Expenditure: Increased capex has positively impacted PSU banks, enhancing their financial standing.
Investor Optimism: Growing investor confidence has led to enhanced investments in PSU banks, underpinning their upward trajectory.
Section 2: Comparative Analysis of PSU and Private Banks in 2024
In 2023 year-to-date, PSU banks have outperformed private banks, with the Nifty PSU Bank index rising over 10 percent, while the Nifty Private Bank index is up around 3 percent.- Mint
Subsection 2.1: Performance Metrics
NPA Ratios Analysis for PSU vs. Private Banks in Q3 of FY23-24
The Net Non-Performing Assets (NPA) ratio is crucial for assessing a bank's loan book health.
In Q3 of FY23-24, both Public Sector Banks (PSBs) and private banks in India displayed substantial improvements in their NPA ratios.
For PSU banks, the State Bank of India (SBI) showcased a Net NPA ratio of 0.77%, a decrease of 57 basis points YoY. Its gross NPA ratio stood at 3.14%, a reduction of 136 basis points YoY.
Indian Bank, a public sector lender, reported a significant improvement with a gross NPA ratio falling to 4.47%.
Conversely, private banks, including HDFC Bank, witnessed a Net Interest Margin (NIM) drop from 4.1% to 3.4%.
Recent Uptrend Values and CASA Growth for Top 5 PSU and Private Sector Banks
The top 5 PSBs demonstrated significant QoQ CASA deposit growth in FY23-24, with Bank of Maharashtra leading with a 50.71% growth.
State Bank of India (SBI) reported a Q4 FY23 net profit of 16,695 crore rupees, marking significant profitability.
In contrast, the share of CASA deposits to total deposits of private sector banks contracted to 39.9% by the end of December 2023, indicating a preference shift towards term deposits among customers.
Growth Rates Comparison Between the Top 5 PSU and Private Sector Banks
The gross NPA ratio for PSBs is expected to improve to 4.1% in FY24 from 5.2% in FY23.
Private banks' gross NPA is anticipated to improve to 2% in FY24 from 2.5% in FY23, showcasing a trend of asset quality enhancement across the banking sector.
With the above facts and figures it provides us an educative and informative comparison between the performance metrics of PSU and private banks in 2024, focusing on NPA ratios, CASA growth, and overall profitability, backed by the latest financial data and expert analysis. And the reason for growing confidence on the PSU Banking sector in India again.
Subsection 2.2: Top Performers
Top 3 PSU Banks in India in FY 23-24
State Bank of India (SBI): With a market capitalization of approximately $80.58 billion as of March 2024, SBI reported a net profit of Rs 50,232 crore for FY23. Its Net Interest Margins (NIMs) were at 3.84% in Q4, and advances increased by 15.99% YoY, with NPAs at 0.67%.
Bank of Baroda (BOB): BOB's market capitalization stood at $17.56 billion. It reported its highest-ever quarterly and annual net profit at Rs 4,775 crore and Rs 14,110 crore, respectively, in FY23. The NII grew by 33.8% and 26.8% for Q4FY23 and FY23, with margins at 3.53% and PCR at 92.43%.
Punjab National Bank (PNB): PNB's market capitalization was $16.60 billion. It saw a significant rise in profits from Rs 201 crore to Rs 1,159 crore, a 477% jump. The NII reached Rs 9,498.7 crore, up 30% YoY, and provisions and contingencies fell by 21% to Rs 3,830 crore in Q4FY23.
Top 3 Private Banks in India in FY 23-24
HDFC Bank: With a market capitalization of $155.91 billion, HDFC Bank reported revenue of ₹2.05 lakh crore in 2023. It operates 7,915 branches and 20,565 ATMs across India.
ICICI Bank: ICICI Bank's market cap was $83.98 billion, with 6,074 branches and 16,927 ATMs. It's known for its strong presence and innovative financial products.
Kotak Mahindra Bank: Kotak Mahindra Bank, with a market capitalization of $41.46 billion, operates 1,996 branches and 2,963 ATMs, known for its efficient services and modern banking solutions.
Asset Management Ratios and Implications
In FY23-24, the asset to management ratios of the top 5 PSU banks in India showed significant improvements compared to the top 5 private sector banks. This reflects in:
In FY23-24, the asset to management ratio comparison between the top 5 Public Sector Banks (PSBs) and the top 5 Private Sector Banks in India highlighted distinct differences, indicating varying strategies and outcomes in asset management and valuation.
Price-to-Book (P/B) Valuation: The asset to management analysis revealed a clear disparity in valuations. Private banks exhibited a P/B valuation of 2.3, slightly below their 10-year average of 2.5. Conversely, PSU banks were valued at a P/B of 1.2, surpassing their long-term average of 0.8. This disparity underscores the higher market valuation of private banks compared to PSU banks.
Market Performance: PSU banks outperformed their private counterparts in market returns, with the Nifty PSU Bank index delivering 30% returns year-to-date. In contrast, the Private Bank index saw a more modest increase of 12%, showcasing stronger market performance by PSU banks.
Earnings Growth Outlook: Despite the robust performance of PSU banks, the market maintains a positive outlook on the earnings growth potential of private banks, driven by sustained asset quality and credit growth. This optimism is rooted in private banks' superior underwriting practices and strategic reserve provisions.
Credit Growth: Credit growth dynamics between the sectors are converging, with PSU banks' credit growth nearing that of private banks by 2-3 percentage points, signaling a reduction in the growth rate gap that existed pre-COVID.
Valuation History and Analyst Recommendations: Historical constraints on trading multiples for PSU banks are being reassessed. Improvements in earnings quality and net interest income have led analysts to suggest a potential re-rating for PSU bank stocks. Notably, target prices for leading PSU banks like SBI, Bank of Baroda, Indian Bank, Union Bank, and Canara Bank have been raised, reflecting a positive market sentiment.
Asset Quality Improvements: PSU banks have concentrated efforts on enhancing asset quality and operational efficiency, which has not only led to better market performance but also strengthened investor confidence in these institutions.
The comparative analysis for FY23-24 demonstrates that while private banks continue to enjoy higher valuations and positive sentiment, PSU banks have made significant strides in performance, potentially setting the stage for a re-rating based on their earnings improvement and asset quality advancements.
Section 3: The Nifty Bank Index and Its Implications
On 7th March 2024, the Nifty Bank Index opened at 48,035.80, peaking at 48,071.70, reflecting market stability...SBIN and HDFCBANK closed positively...BANKBARODA's volatility and PNB's active trading highlighted diverse dynamics.
Analysis of the Weightage of Private vs. PSU Banks in the Nifty Bank Index
In FY23-24, the distribution of weightage within the Nifty Bank Index reveals a significant dynamic between private and PSU banks:
Private Sector Banks
Have seen a shift in their index weightage:
HDFC Bank's weightage decreased to 25.2% from 27.8%.
ICICI Bank experienced a slight increase to 24.8% from 24%.
Kotak Mahindra Bank's weightage declined to 9.2% from 10%.
PSU Banks:
SBI's weightage increased to 12% from 10.1%.
PNB and Bank of Baroda saw their weightage rise to 2.4% (from 0.9%) and 3.1% (from 1.8%), respectively.
This trend indicates a gradual shift towards a higher weightage for PSU banks in the Nifty Bank Index, reflecting changes in market dynamics and the banks' performances.
Analysis of Top 6 Banks Alongside Nifty Bank on 7th March 2024:
The Nifty Bank Index, opening at 48,035.80 and peaking at 48,071.70, showed market stability with a narrow trading range. SBI's and HDFC's demonstrated positive closes with substantial investor interest. In contrast, BOB's volatility and PNB's active trading highlighted diverse market dynamics. This day underscored the banking sector's stable yet dynamic performance, reflecting the influence of investor sentiments and sector valuations amidst evolving market dynamics.
Implications of Recent Trends on the Index Composition and Future Projections
The evolving composition of the Nifty Bank Index, marked by the strengthening position of PSU banks, underscores several key implications and future projections:
Net Interest Income (NII) Growth: PSU banks have exhibited a remarkable 20% YoY and 13.6% QoQ growth in NII, the highest in recent quarters, contributing to their enhanced weightage in the index.
Profit Surge: The collective net profit of 12 PSU banks surged to ₹34,418 crore in Q1 FY24, up from ₹15,307 crore in the previous year, indicating robust profitability.
Share Price Impact: The appreciating share prices of PSU banks have significantly influenced their rising weightage in the Nifty Bank Index.
Market Performance: From May 2020, the Nifty PSU Bank Index surged by nearly 295%, markedly outperforming private banking stocks and contributing to a bullish trend in the overall Nifty Bank Index.
Future Projections suggest:
An anticipated continued upward movement for PSU banks into 2024.
Credit growth projections of 10-12% for PSU banks, with some expected to outperform.
A bullish long-term trend for the Nifty PSU Bank Index based on current momentum and performance improvements.
This analysis not only highlights the current shifts within the Nifty Bank Index but also anticipates continued growth and revaluation for PSU banks, underscoring their pivotal role in shaping the future trajectory of the Indian banking sector.
Section 4: Detailed Financial Analysis
Sub-Section 4.1: Detailed Financial Analysis: Navigating the Stock Trajectories and Market Capitalization of India’s Banking Giants
In the intricate financial tapestry of India's banking sector, a closer examination of stock trends and market capitalization between December 2023 and the initial quarter of 2024 reveals insightful patterns that speak volumes about investor sentiment and market dynamics.
December 2023 Overview: A Prelude to Momentum
HDFCÂ stood out with a closing price of INR 996.60, displaying a narrow high-low volatility range. This stability in price variation mirrors a market consensus of reliability around the bank. The period was marked by a surge in trading volume, indicating robust market participation and investor engagement.
BANK Of BARODA, a stalwart among PSU banks, closed at INR 231.10, showcasing an upward trajectory. The heightened trades and volume in December allude to growing investor interest, possibly spurred by optimistic market forecasts or encouraging bank-specific developments.
Q1 2024 Analysis: A Bullish Sentiment Unfolds
As we ventured into Q1 2024, HDFCÂ witnessed its closing price ascend to INR 1087.95 by March, painting a picture of burgeoning investor confidence. The leap in the number of trades by January further underscores a dynamic market, eagerly rallying behind the bank.
Concurrently, BOB mirrored this positive sentiment, with its closing price climbing to INR 281.75 by March. The spike in trading volume during this quarter symbolizes a growing conviction in the potential of PSU banks, signaling a robust engagement from the market’s end.
Market Dynamics and Investor Sentiment: Deciphering the Enthusiasm
The uptick in trading activity, alongside volumetric expansions and escalated closing prices for banks like SBI and BOB during Q1 2024, signifies a market leaning towards bullish optimism, especially towards PSU banks. Such enthusiasm could be attributed to a confluence of factors, including regulatory facilitation, an uptrend in the banks' financial health, or a broader economic resurgence. Notably, the expansion in trade values during this tenure reflects an augmenting market capitalization, embedding deeper market faith in the banks’ forward journey.
A Sector Radiant with Growth Prospects
The juxtaposition of the data from December 2023 and Q1 2024 lays bare a compelling narrative of upward stock trends and flourishing market capitalization within India’s premier banks, particularly emphasizing the burgeoning prominence of PSU entities. Characterized by escalated closing prices, a surge in trading volumes, and an appreciable increase in trade values, the phase exemplifies a market brimming with confidence in the banking sector’s resilience and growth trajectory. This analysis not only spotlights the banking sector's critical role in India’s expansive financial market landscape but also accentuates PSU banks' central position in magnetizing investor interest and sculpting market trends. Amidst evolving economic conditions and sector-specific advancements, the banking sector stands poised at a juncture of promising growth and potential, ready to chart its course through the ebbs and flows of market dynamics.
Subsection 4.2: Financial Ratios Brief
In the dynamic landscape of Indian banking, understanding key financial ratios is crucial for assessing the health and performance of banks. Here, we delve into critical ratios for the top 6 Indian Banks (3 PSU and 3 Private Sector Banks) as of FY23-24:
Net Interest Margin (NIM)
Net Interest Margin is pivotal for gauging bank profitability, highlighting the spread between interest incomes generated and interest expenses. Notably, in Q3FY23, leading private banks such as HDFC Bank and ICICI Bank reported NIMs at 3.5% and 4.43%, respectively. These figures underscore the efficiency with which these banks utilize their interest-earning assets in comparison to the interest paid out.
Efficiency Ratio
The Efficiency Ratio serves as a benchmark for operational efficiency, revealing the proportion of revenue consumed by non-interest expenses. An optimal efficiency ratio is lower, signifying that a bank is more effectively converting its operational activities into revenue. Specific metrics for both PSU and private banks would provide a clearer picture of operational efficiency across the sector.
Price-to-Book (PB) Ratio
The Price-to-Book Ratio is crucial for understanding market valuation relative to the bank's book value. Current valuations place private banks at a PB of 2-2.4, suggesting a higher market valuation compared to PSU banks, which have recently seen an uplift to a PB ratio of 1-1.3. This variation reflects market perceptions and investor confidence in these institutions.
Operating Ratio
This ratio assesses the cost efficiency of bank operations, with a lower ratio indicating greater operational efficiency. It measures the portion of net sales that goes towards covering operating expenses. Precise values for this ratio across PSU and private banks would offer insights into their operational management and cost control measures.
Liquidity Coverage Ratio (LCR)
LCR measures a bank's capacity to manage short-term liquidity requirements, with higher ratios indicating a stronger position to cover 30-day net cash outflows with high-quality liquid assets. As of specific dates, HDFC Bank reported an LCR of 137.95%, and SBI Group reported 132.36%, showcasing their liquidity resilience. Detailed figures across more banks would enhance understanding of sector-wide liquidity health.
Section 5: Future Outlook and Conclusion
Analysis of Factors Contributing to the Improvement in Gross NPA Rates for PSU Banks
The improvement in the gross NPA rates of the top 5 PSU banks in FY23-24 has been driven by several critical factors:
Recoveries and Upgradations: Contributing to 45% of the reduction in gross NPAs, highlighting the success of recovery strategies.
Reduction in Stressed Asset Pools: A decrease from Rs 2.4 lakh crore to Rs 1.7 lakh crore in stressed assets, enhancing asset quality.
Write-offs and Recoveries: Mix of strategies has effectively reduced NPAs, with the Insolvency and Bankruptcy Code playing a key role.
Clean-up of Balance Sheets: Increased transactions with ARCs for selling off NPAs, improving balance sheet health.
Moderation in Slippage Ratio: Indicates an overall betterment in credit quality.
Future Growth Outlook for the Top 5 PSU Banks for the Rest of FY24
The top 5 PSU banks are expected to continue their upward trajectory in FY24:
Net profits are anticipated to reach Rs 1.5 trillion by FY25 and Rs 1.7 trillion by FY26.
The sector has seen a notable re-rating, potentially boosted by the privatization of IDBI Bank.
Strong earnings growth, improved asset quality, and robust balance sheets underpin future growth projections.
Closing Thoughts on the Evolving Landscape of the Indian Banking Sector and Its Implications for the Economy
The Indian banking sector's transformation has been monumental, driven by reforms, digitalization, and a focus on financial inclusion. The sector's evolution has profound implications for the economy, including:
Economic Growth: Banking sector's revitalization has set a strong foundation for future economic expansion.
Financial Inclusion: Expansion of services has reached underserved areas, enhancing financial inclusion.
Risk Management: Improved asset quality and profitability reflect better risk management.
Technological Advancements: While technology has boosted efficiency, it also necessitates stringent cybersecurity measures.
Global Economic Volatility: Continues to be a concern, highlighting the need for cautious exposure management.
As we look ahead, the banking sector is positioned for sustained growth, supported by stable macroeconomic indicators. Yet, it must navigate challenges such as technological risks and global volatility carefully.
Reference
PSU banks expected to see significant upward movement in 2024: Sudip Bandyopadhyay
Budget 2024: PNB, BoB to SBI — experts recommend these five PSU bank stocks to buy today
Unlocking Value: Why Long-Term Investors Should Consider the Bullish Outlook on PSU Banks
Eye on elections: PSU bank stocks may continue to race ahead as BJP prospects instil confidence
Decoding the Growth Trajectory of India’s PSU Sector in 2024
Budget 2024: Why experts are bullish on PSU bank stocks after assembly election results explained
Analysis on the weightage shift between private and PSU banks in the Nifty Bank Index
PSU banks expected to see significant upward movement in 2024: Sudip Bandyopadhyay
Weekly outlook for Nifty PSU Bank Index by Equitypandit, May 22, 2023, Outlook
Comparison of Nifty PSU Bank's performance against the Nifty Bank Index
Very good writing and very informative.