PSU bank stocks: PSU bank stocks outshine private peers

Mumbai: Investors who had almost written off public sector banks in favour of their private peers are being forced to reconsider some of their choices, at least for now.

As state-owned lenders witness a on better asset quality and improved profitability, their shares have been topping the returns charts with several of them at multi-year highs, pushing behind private banks – the recent Dalal Street favourites.

In the past month, State Bank of India gained almost 15%, Punjab National Bank jumped 26.82%, and Canara Bank gained 23.5%. Union Bank and Bank of Baroda have gained over 13% and 15% each.

In contrast, HDFC Bank slumped 14.2%, Kotak Mahindra fell 4.9%, Axis Bank declined 6% and ICICI Bank rose 0.74% in this period.

The share prices are reflecting an improved investor perception of the public sector banks’ profitability in comparison with the private lenders.

PSU Bank Stocks Outshine Private PeersAgencies

“Due to the unusually low credit costs and improvement in asset quality, PSU banks are witnessing re-rating due to higher PAT growth than private banks,” said Niket Shah, fund manager at Motilal Oswal AMC. “The low credit costs have increased PSU banks’ profits by huge margins while the growth in asset under management (AUM) is strong at 12-14%.”This changing narrative about PSU banks is in stark contrast to the situation till a few months ago when investors were not convinced about their prospects and considered the rebound in their share prices as merely a ‘catch up’ rally after over a decade of being laggards. Their superior earnings in the recent December quarter compared to private banks, whose results disappointed investors sending the share prices tumbling, have strengthened expectations about their outlook.The narrowing of share valuations between PSU and private banks reflects the steady shift in investor preferences within this space.

The Price to Book (PB) ratio – a valuation measure – of private banks, which were trading at 2.5-2.8 times a few months ago, are at 2-2.4 times now, said Shah. PSU Banks, which were trading at 0.4-0.6 times PB before the cycle improved, are currently at 1-1.3 times on average.

Their valuations are still below that of private banks and analysts are expecting this gap this narrow further, which could mean that PSU bank shares would outperform their private counterparts.

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