State-owned lenders are experiencing improvement in asset quality and profitability, resulting in their stocks outperforming private banks, with many of them hitting multi-year highs. Last month, State Bank of India gained nearly 15%, Punjab National Bank jumped 26.82% and Canara Bank gained 23.5%. Union Bank and Bank of Baroda saw growth of over 13% and 15% respectively.
In contrast, HDFC Bank declined 14.2%, Kotak Mahindra declined 4.9%, Axis Bank declined 6%, and ICICI Bank It witnessed a marginal growth of 0.74% during the period, reported ET.
PSU Bank vs Private Bank
These share prices indicate increased investor sentiment regarding the profitability of public sector banks compared to private banks.
Niket Shah, fund manager, Motilal Oswal AMC, said PSU banks are facing re-rating due to exceptionally low credit costs and better asset quality, resulting in lower profits after tax (PAT) compared to private banks. There has been more growth. He highlighted that the substantial growth in profits of PSU banks was mainly driven by lower credit costs and strong assets under management (AUM) growth of between 12-14%.
This change in sentiment towards PSU banks is in sharp contrast to the sentiment a few months ago when investors were skeptical about their prospects. The significant improvement in earnings in the December quarter, especially compared to private banks, whose results disappointed investors and led to a decline in share prices, has boosted confidence in the outlook for PSU banks.
The narrowing gap in share valuations between PSUs and private banks indicates changing preferences of investors in the sector. Earlier, private banks commanded price to book (PB) ratios as high as 2.5-2.8 times, while PSU banks traded at lower PB ratios of 0.4-0.6 times. Currently, private banks are valued at 2-2.4 times PB, while PSU banks have seen an average rise of 1-1.3 times.
Analysts expect valuations to rise further, suggesting that PSU bank stocks may outperform their private counterparts in the future.