Year-to-date, the Nifty 50 has given close to 18% returns, whereas the Nifty Bank index gave a little over 10% returns. This underperformance was largely due to the moderate rise in leading private banks.
But if we broaden the analysis, second rung private sector banks did extremely well and even beating them was the entire public sector banking pack.
Year-to-date, the Nifty PSU Bank index gave 30% returns, whereas the Private Bank index gave 12% returns.
Public Sector Banks
Over the past few years, public sector banks have transformed themselves into better and more sustainable franchisees.
Sustained credit growth, significant improvement in the asset quality, and stable to higher margins drove the robust earnings performance of state-owned banks and subsequently the share prices.
Barring State Bank of India, all the other listed PSU banks rallied 22-62% year-to-date.
Most of the banks are confident that the current double-digit credit growth would be sustained in 2024, due to a resilient domestic economy and a gradual uptick in demand from rural areas.
Aided by the upbeat outlook, brokerage firm Motilal Oswal Financial Services sees scope for another round of re-rating for PSU bank stocks. It raised the target prices of SBI, Bank of Baroda, Indian Bank, Union Bank, Canara Bank and Punjab National Bank.
“A reflection on PSBs valuation history may cause trading multiples to look constrained, however the quality of earnings, growth outlook and broader re-rating in PSU entities will nevertheless enable steady performance of the sector,” the brokerage said.
For the top six public sector banks, Motilal Oswal estimates net profit of Rs 1.5 trillion for FY25, and Rs 1.7 trillion in FY26.
Private Banks
While banks in the private sector space also reported decent earnings growth, the second rung bank stocks outperformed the large caps this year.
Federal Bank, South Indian Bank, Karur Vysya Bank, IDFC First Bank, Karnataka Bank, Dhanlaxmi Bank, RBL Bank, CSB Bank, and Jammu & Kashmir Bank gained over 13-124% year-to-date.
Among large cap banks, ICICI Bank, Axis Bank and IndusInd Bank gave 14-28% returns, whereas Kotak Mahindra Bank and HDFC Bank gave just 1% returns.
As far as earnings growth outlook for private banks is concerned, analysts remain positive and expect their asset quality to remain healthy, led by superior underwriting quality and prudent provision reserves.
“We believe that with inflation moderation seen in H1FY24, the credit growth will remain intact in the range of 12-16% and continue in 2024 as well. The scheduled general election in 2024 will also help boost infrastructure spending, benefiting credit growth,” said Shreyansh Shah, analyst at Stoxbox.
Stock Picks
In the public sector space, SBI, Bank of Baroda and Canara Bank are the top picks for Motilal Oswal. The brokerage has raised the target price for SBI to Rs 800 from Rs 700, for Bank of Baroda to Rs 280 from Rs 240, and Canara Bank to Rs 550 from Rs 440.
SBI is also a top pick for Stoxbox in the PSU space.
“We do not see any challenge in the uptrend of credit costs in 2024 due to its balanced loan portfolio, and we expect credit costs and asset quality to remain stable in 2024,” Shah of Stoxbox said.
In the private banking space, the analyst has picked HDFC Bank, Karnataka Bank, and City Union Bank as the top picks.
“Karnataka bank has shown a remarkable turnaround by delivering healthy RoA and RoE aided by improvement in asset quality. With continuous growth in advances, we believe that the bank will witness an improvement in net interest income in 2024,” Shah said.
(Data inputs from Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)