Over the past few years, the performance of PSU banks has been shaky. The opposite holds true for private sector banks. A look at the performance of the Nifty PSU Bank index relative to the Nifty 50 index in the past one, three and five years shows the return differential (Nifty PSU bank minus Nifty 50) at -27.8%, -63.1% and -85.5% respectively. On the other hand, Nifty Bank index, in which the majority of current constituent stocks are private sector banks, the return differential (Nifty bank minus Nifty 50) has been 4%, 15% and 32.9% respectively over the same period.
According to data compiled from RBI, gross NPAs as a percentage of total advances for PSU banks jumped from 4.4% to 14.6% between March 2014 and March 2018, whereas the same increased from 1.8% to 4.7% for private banks. The performance differential between the two groups is also apparent from the historical RoA and RoE numbers. In March 2018, the RoA and RoE of PSU banks was -0.84% and -14.62%, relative to 1.14% and 10.12% for private banks.
PSU banks have suffered due to rising NPAs and weak governance practices. Regulatory issues and environmental concerns have contributed to increased NPAs by making most projects in sectors like roads and power unviable. Increased provisioning for bad loans eroded the capital base of some PSU banks and forced the government to configure measures like recapitalisation and bank mergers.
For investors looking for exposure to banking stocks, private banks provide a good opportunity as most brokerage houses are turning bullish on their respective coverage universe. Motilal Oswal says private banks will continue to capitalise on the challenges faced by PSU banks, which will help improve their loan and deposit market share. The brokerage expects private sector banks’ earnings trajectory to improve between 2018-19 and 2020-21 as a large part of their asset quality challenges and provisioning pressure have been done away with. Also, the recent tax rate cut is likely to provide a fillip to their 2020-21 ROEs in the range of 110-210 basis points.
SBICap Securities expects stable growth for private banks on account of healthy pre-provisioning profit on the back of sustained reflation in yields and continued market share gains. Following the tax rate cut, the brokerage assumes that banks will significantly run down their accumulated deferred tax assets (DTA). On the other hand, Elara Capital expects private banks to post strong operating performance in the second quarter of 2019-20, aided by greater spread and high credit growth.
A Prabhudas Lilladhar report says increasing retail loans and improved operating performance are factors that will drive the performance of private banks in the second quarter. Kotak Securities says private banks under its coverage will benefit from strong AUM and loan growth, stable asset quality and improvement in NII growth. Sixteen private banks covered by Bloomberg analysts have a total of 466 recommendations. Of these, 76% are buy, 17% are hold and 7% are sell recommendations. We look at five stocks covered by at least five analysts and have a 1-year forward price potential of more than 10%.
Some private bank stocks are available at low prices
Brokerages are turning bullish on these counters due to a number of factors.
RBL Bank
The bank offers specialised services under different business verticals. The Q2 results were disappointing due to the increase in the stressed assets and enlarged provisions. However, analysts remain bullish due to its reasonable valuations which are factoring in most of the negatives.
Federal Bank
This scheduled commercial bank headquartered in Kerala has 1,251 branches in India. Reliance Securities says the bank is likely to be one of the key beneficiaries of tax cuts, with little DTA impact on earnings during 2019-20. The brokerage expects the bank to report RoA and RoE of 1.2% and 16% respectively in 2020-21 on the back of margin improvement, operating leverage and traction in fee-based income.
Karnataka Bank
This ‘A-class’ scheduled commercial bank is based in Mangaluru. Although Q2 results were below estimates, the management commentary on future outlook is encouraging. AnandRathi believes with a significant portion of corporate-book stress already recognised, the asset quality of the bank will stabilise and focus will shift to normalising profitability. The stock is trading at inexpensive valuations.
IndusInd Bank
A new generation private bank, IndusInd offers commercial, transactional and electronic products and services. It reported stable numbers in the September quarter with expanding NIMs and steady asset quality. JM Financial believes the risk-reward is favourable for long-term investors given the bank’s adequate capital, healthy pre-provision operating profit, and calibrated growth approach.
DCB Bank
This new generation bank has 334 branches. A report by HDFC Securities mentions sustained cost control and stable margins as silver linings. In the September 2019 quarter, it reported stable NIMs and displayed operating leverage improvement. However, the brokerage expressed concerns about the bank’s asset quality deterioration which could lead to higher slippages in future.
Note: ICICI Bank, Axis Bank and HDFC Bank have not been included as they were covered in the edition dated 21 October 2019.
