Private sector lenders outpaced their public sector rivals in terms of profit growth in the quarter ended December 31, 2023. Data collated by Ace Equity showed that the combined bottom line of private banks increased by 24% YoY to over Rs 46,000 crore in Q3FY23. On the other hand, the cumulative net profit of public sector banks increased 3.83% YoY to Rs 30,294 crore during the quarter under review. Overall, the banking sector including private and PSU banks posted a 15% YoY rise in Q3FY24.
Over the past 12 months, the Nifty PSU Bank index has soared 94% till February 26, 2024, while the Nifty Private Bank index has rallied 14% during the same period. Will the momentum shift in favour of private sector lenders post the result season?
IIFL Securities in a report said, “We prefer private over PSU banks, as the latter’s earnings momentum is slowing and valuations are no longer cheap.” The brokerage is positive on Axis Bank, HDFC Bank and IndusInd Bank. IIFL Securities further added that deposit mobilisation was better for private banks compared with PSU banks for the nine-month ended December 2023.
The net interest margin of the private and public banks grew by nearly 17% and 5% YoY during Q3FY24. Overall, the banking sector witnessed a cumulative growth of nearly 11% YoY during the same period.
Motilal Oswal Financial Services added that PSU Banks have delivered a significant outperformance over the past three years and the sector has seen a significant re-rating, the stock valuations still look reasonable in context to business growth and profitability.
“The combined profitability of six PSBs under our coverage will surpass Rs 1 lakh crore in FY24. We estimate aggregate earnings of our PSB coverage to register a CAGR of 21% over FY24-26E, thereby reaching Rs 1.7 lakh crore by FY26E. We believe that while NIMs may remain range-bound with a slight downward bias, the improvement in opex ratios, scope for further credit cost reduction (barring SBI), and a healthy treasury performance will enable the sector RoA to reach around 1.2% by FY26E,” the brokerage said.
“Considering PSBs’ valuation history, their trading multiples may look constrained now; however, the quality of earnings, growth outlook and broader re-rating in public sector enterprises will enable steady performance for the sector. We maintain an overweight stance on the sector and roll forward our price targets to FY26. State Bank of India and Union Bank are our top picks,” Motilal Oswal said in a report.
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