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Private vs Public Sector Banks Analysis

Aug 31, 2024

Industry Analysis: Private vs Public Sector Banks

Overview

  • Discussion on whether private sector banks will make a comeback compared to public sector banks.
  • Comparison of the performance over the last 3-4 years.

Performance Comparison

  • March 2021 Data:
    • Public Sector Banks Index: +311%
    • Private Sector Banks Index: +49.71%
  • Nifty Private Bank Index vs PSU Bank Index:
    • Comprehensive outperformance of PSU banks since 2021.

Reasons for Outperformance of PSU Banks

  1. Profitability Trends:
    • Private banks’ profits increase 3-3.5 times from FY18 to now.
    • PSU banks had losses from FY16 to FY20 but saw a turnaround from FY21 to FY24 (profitability increased 4 times).
  2. Balance Sheet Cleanup:
    • Public sector banks contributed to 53-54% of the industry loan book.

ROA Tree Analysis

  • Explains how banks derive profits using items like interest income, OPEX, PPOP, provisions, and non-performing assets.
  • Key Metrics:
    • PPOP (Pre-Provision Operating Profit): Operating profit in banks.
    • GNPA and NNPA: Gross and net non-performing assets.
    • Provision Coverage Ratio: Provisions set against GNPA.

Performance Metrics

  • PSU Banks:
    • GNPA fell from 9% to 3.4% (Q2 FY21 to Q4 FY24).
    • NNPA reduced from 2.7% to 0.7%.
  • Private Sector Banks:
    • GNPA fell from 4.1% to 1.7%.
    • NNPA reduced to 0.4% of 1%.

Market & Growth Dynamics

  • Market Share:
    • Private banks’ market share increased from 35% to 41%.
    • PSU banks’ market share decreased from 57% to 52%.
  • Credit to Deposit Ratio:
    • Influences on liquidity due to RBI guidelines.
    • HDFC Bank, Axis Bank needing to adjust their ratios.

Valuations

  • PSU Banks:
    • P/E multiple: 9.7x
    • Price to Book: 1.6x
    • Example: State Bank of India’s price to book at 1.8x.
  • Private Sector Banks:
    • Example: Kotak Bank’s price to book at 2.1-2.3 times.
    • Challenges with credit to deposit ratios post HDFC merger.

Key Risks

  • For Private Banks:
    • Impact of high net interest margins base in FY24 on future EPS growth predicted to be single-digit.
    • Credit cost increase potential in FY25.

Conclusion

  • Identified reasons for private sector banks' underperformance and potential turnaround indicators.
  • Use of ratio charts to track the relative performance of private vs PSU banks.
  • Strategic Insights:
    • Understanding market dynamics and valuation measures.
    • Importance of monitoring credit costs and operational metrics.

Full transcript