Private Banks vs PSU Banks: Which ones should you pick in this market?

Despite the seasonal weakness seen in the quarter ended June 2023 (Q1FY24), most banks have reported a healthy credit growth, largely led by the retail/SME segment. The managements have also been upbeat about the growth momentum sustaining. Overall, banks have been performing well on the back of the expansion of loan portfolios, rise in margins, and improving asset quality.

In the last 1 year, PSU banks have massively outperformed private banks with the Nifty PSU Bank index surging over 60 percent and the Nifty Private Bank index advancing 14 percent. In 2023 YTD as well, this trend has continued. The Nifty PSU Bank index has risen over 5 percent in this period whereas the Nifty Private Bank index is up 4 percent.

Constituents

This year so far, 8 of the 12 constituents in the Nifty PSU Bank index have given positive returns while in the case of the Nifty Private Bank index, only 5 of 10 constituents were in the green.

Indian Bank rose the most in the PSU Bank index, up almost 44 percent, followed by Bank of Maharashtra, up 25 percent, Union Bank of India, up 12 percent and Punjab National Bank, up around 11 percent.

Among losers, SBI shed the most this year, down over 7 percent, followed by Indian Overseas Bank, Canara Bank and UCO Bank, which fell between 1 and 4 percent in 2023 YTD.

Meanwhile, among private banks, IDFC First Bank was the top performer, up over 56 percent, followed by RBL Bank, up 23 percent, and IndusInd Bank, up 14 percent.

City Union Bank was the biggest laggard in this space, down 31 percent, followed by Kotak Bank, HDFC Bank, Federal Bank and Bandhan Bank, down between 1 and 3.5 percent.

So among private and PSU banks, which ones should investors focus on more and why? Let's find out.

Vinit Bolinjkar, Head of Research, Ventura Securities, prefers PSU banks over private ones.

India is an underbanked country and there is a significant growth opportunity in retail banking. In addition, positive business scenarios and rising investment in India are improving the business prospects for corporate banking. So, the growth opportunity for both PSU and private sector banks are similar.

But PSU banks are available at a discounted valuation of 20-30 percent, compared to the private sector banks. Moreover, after the balance sheet cleaning, PSUs are ready for the next leg of growth with fresh capital and a healthy balance sheet. They have also started paying dividends after a pause of 3-4 years. As a result, we are expecting earnings growth and valuation re-rating of PSU banks in the coming years, which could offer more upside compared to private sector banks.

Our top picks in PSU banks are – SBI, Bank of Maharashtra, Canara Bank, and Bank of Baroda.

In the contrary, Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities, likes private banks better.

We prefer the private sector banks for their healthy growth prospects, improving deposit growth and strong asset quality. Our top picks from the sector are ICICI Bank, SBI and Federal Bank.

Veer Trivedi, Research Analyst, SAMCO Securities, has also chosen private sector lenders over PSU counterparts.

The peak ROA and NIM numbers are now behind the banking system. The credit growth however is expected to remain strong which might still drive the PSU banks. However, going forward a sustained growth in the book with no negative surprises on the slippages is what would majorly drive the stock prices. This is where we start preferring private peers. Further, the private players have better contingent provisions versus PSU banks which could further aid in driving the ROAs. Our top 3 picks in the banking pack would be ICICI Bank, IndusInd Bank, and HDFC Bank.

Suman Bannerjee, CIO, Hedonova, as well, has picked private banks between the two.

Generally, private sector banks offer a more promising outlook compared to PSU banks due to their often more efficient operations, better customer service, and ability to adapt to changing market dynamics.

My top picks are IDFC First Bank and Kotak Mahindra Bank.