Despite rising interest rates and high inflation, the banking sector is doing well on the back of a recovering economy, said market daily Business Standard in a report. The last couple of quarters indicate credit demand is picking up and Return on Assets (RoA) is more than acceptable at the moment. The PSU bank pack may be more interesting at the moment simply due to being valued at far lower multiples than the private banks, BS said.
In terms of index valuations, the Nifty Private Bank index is at a current price to earnings or PE of slightly over 16 times (x) while the Nifty PSU Bank index is at a current PE of about 9x. This is despite strong outperformance by the PSU Bank index, which is up 50 percent in the last 12 months while the private bank index is up 16.8 percent, said the report.
The entire sector has beaten the Nifty (up 6 percent in the same period) comfortably – the Bank Nifty is up 16.6 percent, it added.
On an incremental basis, the January credit growth moderated but stayed positive. The industrial segment’s credit growth was stable at 8.7 percent YoY, but lending to the NBFC (non-banking financial companies) segment moderated and hit a 4-month low at 31 percent YoY and was down 2.5 percent month-on-month (MoM). In the retail segment, growth was sustained by high-yielding unsecured loans and vehicle finance, said the BS report.
However, one negative is weak deposit growth, which is prompting upward repricing of deposit rates with the loan-deposit (LD) ratio rising to the above 75 percent mark. PSU banks have lower LD ratios compared to the larger private banks, which are edging into the 90 percent zone, it said.
Net interest margins (NIMs) were up through Q3 but are likely to moderate going forward as a result of this. There’s been reasonable growth in non-interest income and asset quality remains good and both gross and net non-performing assets (NPAs) have dropped across the board. PSU banks have more improvement in this regard because they also have higher bases for NPAs, as per the report.
However, PSU banks have seen sharper corrections in 2023, largely due to Adani exposures. Among the 12 PSBs in the Nifty PSU Bank, most have credit growth in the range between 12 percent and 22 percent, added the report.