The valuation gap between public sector banks (PSBs) and private lenders has been narrowing in recent months as the state-owned lenders continue to report stronger balance sheets and sustained profitability. Data from the NSE show that the trailing twelve-month price-to-earnings (P/E) ratio gap between the Nifty PSU Bank Index and the Nifty Private Bank Index moderated to about 9.41 as of March 13, compared with 11.85 in December.
However, the interesting part is that this happened because the P/E of private banks declined while it was steady for PSBs. The P/E ratio of the Nifty PSU Bank Index stood at 8.45x as on March 13, largely unchanged from 8.44x in December. In contrast, the Nifty Private Bank Index saw its P/E ratio decline from 20.29x to 17.86x during the same period, leading to the valuation differential becoming narrow.
Last March, the P/E ratio of PSBs stood at 6.11x whereas for private banks, it was 14.46x.
Private banks rose sharply till December
Since then, private banks rose sharply till December before it fell. In comparison, PSBs have shown a slow but steady rise.
“We believe that balance sheet strengthening and strong, sustained earnings visibility have resulted in a valuation catch-up for PSBs, thereby narrowing the gap versus their private peers,” said Dnyanada Vaidya, research analyst – BFSI at Axis Securities.
The rally in the PSB stocks reflects this outperformance. The Nifty PSU Bank index has gained 3.26% in the past three months, while the Nifty Private Bank index has fallen 11.43%. Over one year, public sector banks have rallied 47.25%, significantly higher than the 6.49% rise in the private bank index. Over three years, the PSU bank index has surged 127.32%, compared with 26.88% for private banks.
Individual stock performance also reflects the divergence between the two segments. Among public sector lenders, shares of State Bank of India rose 8.7% between December 12 and March 13, while Union Bank of India gained nearly 14% and Bank of India advanced 6.4%. In contrast, several private bank stocks declined during the same period, with HDFC Bank falling 18.6%, ICICI Bank slipping 8.1% and Axis Bank declining 6.7%.
What do analysts say?
Analysts said the shift partly reflects relatively slower growth among private lenders and the continuing balance sheet adjustments in the segment. Private banks have delivered comparatively slower loan growth, while loan-deposit ratios have remained elevated as lenders attempt to rebalance their funding mix. At the same time, stress in unsecured retail segments has kept credit costs relatively higher.
“Recently, PSBs have been growing more rapidly in terms of credit growth. There has been some reduction in provisioning as well. They come at a much lower yield and spreads appeared to be bottoming out in the December quarter,” said Dhananjay Sinha, chief executive officer and co-head of institutional equities at Systematix Group.
According to CareEdge Ratings, scheduled commercial banks recorded net advances growth of 13.4% year-on-year in the quarter ended December, supported by festive demand and lending across housing, MSME and corporate segments. Public sector banks continued to outpace private peers in loan growth during the period.
However, deposit mobilisation lagged credit offtake, with deposits growing 10% year-on-year, reflecting subdued current account and savings account (CASA) accretion and a shift towards higher-yield term deposits, the report said.