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    PSUs vs private banks: Which side will bulls lean after Q4 show?

    Synopsis

    Indian public sector banks (PSBs) have seen a significant fall in their stocks so far this year as compared to private banks, which have remained resilient amid the ongoing banking crisis. On a year-to-date basis, Nifty PSU Bank index slumped down 7%, however, Nifty Private Bank managed to limit losses, with its index falling just 2% this year. Rising interest rates and the recent Adani-Hindenburg scandal are the main reasons for PSBs' underperformance, as per V K Vijayakumar of Geojit Financial Services.

    PSUs vs private banks: Which side will bulls lean after Q4 show?iStock
    After a stellar run last year, PSU bank stocks have witnessed strong selling pressure so far this year. Private bank stocks, meanwhile, managed to stay resilient amid the ongoing volatility.

    The banking sector has taken a hit in 2023 amid a widespread sell-off on rate hike concerns, economic slowdown, and the recent banking crisis in the US.

    On a year-to-date basis, the Nifty PSU Bank index cracked 7%. On the other hand, Nifty Private Bank managed to limit losses, with the index falling just 2% this year so far. Equity benchmark Nifty50 shed over 2% on a YTD basis, while Nifty Bank is down around 1%

    chart1ET CONTRIBUTORS

    Why are PSU bank stocks under pressure now?
    After strong gains in 2022 (up 45%), PSU stocks saw a fresh wave of profit-booking amid weakness in the market. Additionally, the Adani-Hindenburg fiasco played a catalyst for this profit booking and led to a dent in investor sentiment over concerns about PSU banks' exposure to the Adani Group. Rising interest rates were another factor that added fuel to the fire.

    Except for Indian Bank, all components of the Nifty PSU Bank index are in the red this year, with shares of Indian Overseas Bank, Central Bank of India, Punjab and Sind Bank, and UCO Bank down over 24%. From the private bank stocks pack, Kotak Mahindra Bank, HDFC Bank, and ICICI Bank have managed to give positive returns, while the rest have disappointed D-Street.

    Chart2ETMarkets.com

    Why did private banks fare better?
    It is important to understand that private banks have been the wealth creators in the banking sector and not PSU banks. Therefore, both FIIs and DIIs - PMSs and HNIs prefer buying the leading private banks over PSU banks, says V K Vijayakumar of Geojit Financial Services.

    That said, one has to concede that the PSU Bank Index was the best-performing index in 2022. "Even now, accumulation is happening in private sector banks. This puts PSU banks under pressure," Vijaykumar added.

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    Eye on Q4 numbers


    Brokerage firm Motilal Oswal Securities expects systemic loan growth to remain robust, with a healthy credit growth of 15.7% YoY in the March quarter, driven by continued traction in the retail and SME segments.

    For FY23, the earnings of PSUs are likely to have grown at a faster pace than the private sector ones. Aggregate earnings growth is likely to be 56% for PSUs and for the private sector 39%.

    However, despite an impressive set of results, PSU banks underperformed private banks in the previous quarter.

    We saw a mean reversion because PSU stocks had previously strengthened and outperformed private banks in the previous quarters. Another reason is a rise in bond yields because initially, rate hikes help banks in improvement in margins, but later on, they see an M2M loss on their bond portfolio, and PSU banks have a major impact on it, explains Santosh Meena, Head of Research, Swastika Investmart.

    Brokerage Kotak Equities expects banks to report healthy asset quality numbers for another quarter in Q4, as credit quality seems to have improved, with higher upgrades by rating agencies than downgrades in the past few months. For most banks, the restructured book has seen significant seasoning and should see fewer slippages hereon, the brokerage said.

    Vijaykumar believes that early Q4 results indicate that the good performance of the banking sector is likely to continue for a few more quarters. The results of HDFC Bank were good, and that of ICICI Bank were excellent. These stocks have run up in recent days but look good for a few more quarters.

    Axis Bank surprised the Street with a loss of Rs 5,728 crore on the Citibank deal. The stock was down nearly 3% after the results.

    Which side will the Bulls bet on?


    Bank bulls are likely to focus on the leading private banks and the leading names in the PSU space, particularly SBI, and BoB, believes Vijaykumar while adding that "Rising deposit rates will put some pressure on the NIMs of banks, going forward. Therefore, investors should expect only moderate returns from banks in the coming quarters. Of course, long-term prospects are bright."

    ICICI Securities also believes that PSU banks are seen delivering a continued strong earning trajectory. The brokerage expects private banks’ advances to grow 17% YoY, while PSBs will witness healthy traction at 16% YoY.

    "Management commentary on segments to drive advance growth, liabilities accretion, while margin trajectory amid the rising cost of funds will be keenly watched," the brokerage house added.

    For Motilal Oswal Securities, Axis Bank, ICICI Bank, SBI, and Federal Bank are the top buys in the banking pack. For Axis Securities too, ICICI Bank, SBI, and Federal Bank are the top bets.

    Meena, on the other hand, believes that in India, capex is the dominant trend, and PSU banks are the primary beneficiaries of this.

    "The current correction presents an opportunity to invest in PSU banks since, in our opinion, they will begin outperforming private banks once more. Our top picks will remain SBI, Bank of Baroda, and Canara Bank in the PSU space," Meena added.

    (With 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 The Economic Times)




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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