Private vs Public Sector Banks Analysis

Hi investors, welcome to SOIC. So in today's industry analysis, we will analyze Will private sector banks make a comeback versus the public sector banks? Or will the PSU banks keep doing well versus the private sector banks? So first let's see what has happened in the last 3-4 years. So in the last 3-4 years, if you look at the comparison here So this is data which is from March 2021 So public sector banks The index of private sector banks is up by 311% whereas the index of private sector banks is up by 49.71%. And secondly, if you look at the comparison here, then here we have your Nifty private bank index above and below we have PSU bank index in relative strength. So whenever it goes to green, it means that the private sector banks are outperforming the public sector bank index. the PSU Bank Index is doing much better versus the Private Sector Bank Index. So since 2021, it has comprehensively been in red. It means that the PSU banks are outperforming the public sector banks. So what are some of the reasons and why we are doing this video? Because it could be that some of those reasons might go away going forward in next 2-4 years. And how can we assess these two particular indexes from here? And what can happen in private banks and what can happen in public sector banks? We'll find that out in this particular video. With this, let's start. And first, what we see in the starting is why private banks have underperformed the public sector banks. This is a very important topic to understand. So one of the key reasons is that if you analyze the profitability here, see that the profit pool of private sector banks has always been good, like their profitability has been growing consistently. If you check from FY18 to now, you will see that nearly the profits of private sector banks have become 3 to 3.5 times, more than 3.5 times. Whereas in the case of public sector banks, if you do a similar analysis, then you will find that in the case of PSU banks, FI16 to FI20, cumulatively, public sector banks were making losses. That means public sector banks were in a gap between FI16 to FI20. And after that, there was a turnaround where their profitability was nearly 4 times from FI21 to FI24. So one of the key reasons for underperformance of FI21, private sector banks versus public sector banks has been that the public sector sector banks balance sheet cleanup okay country balance sheet cleanup okay because public sector banks still today make up for nearly 53 to 54 percent of the entire outstanding industry loan book so this is one of the reasons and you can see that delta is in high performance because of this second reason which is very important you have to understand what is the role of the ROA tree in the banks So what is ROA tree? Whenever you talk about a company, a company does sales. After sales, the company earns gross profit. That is, if we remove cost of material, the company earns gross profit. After gross profit, if you remove other expenses, like if the company is doing expenditure in marketing, company is doing expenditure in employees, company is doing expenditure in electricity, then we come to EBITDA. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. When you subtract depreciation and amortization, you come to EBIT which is Earnings Before Interest and Taxes. When you subtract interest cost, you come to PBT which is Profit Before Tax. When you subtract taxes from PBT, you come to Profit After Tax. Similarly, what do you do in the case of banks? In the case of banks, you start with the first item which is known as the interest income of a bank. So, what is the interest income of a bank? The total interest earned by the bank minus the interest it expends. Now, let's come to the interest income. What else do you add from the interest income? The other income, if the bank issues a credit card, the bank earns a fee income. If the bank is giving a loan, the processing fee is earned on the loan. When you add the other income to the interest income, you come to the total income of a bank. Then, what comes to the total income of a bank? OPEX comes. So, what do you minus from the total income of a bank? OPEX. So, when we minus OPEX, what does OPEX mean in the case of a bank? In the case of a bank, it means the rent of a branch, the electricity cost, the cost of staff, the cost of IT, right? N number of costs. So, when we subtract that cost, we come to a thing called PPOP. That is Pre-Provision Operating Profit. So, it is very important to understand PPOP because in the case of banks, operating profit is equivalent to PPOP of banks. So, if someone asks you what is operating profit in banks, then you have to tell them that the PPOP of banks, that is Pre-Provision Operating Profit, is the operating profit of banks. Then, what do we subtract from Pre-Provision Operating Profit? Provisions. So, it is important to understand that in the case of banks, there are gross non-performing assets and net non-performing assets. So, when you subtract provisions from GNPA, you come to NNPA. So, GNPA is the gross non-performing assets of banks. So, again, buckets are made in it. There will be a bucket of 1 to 30 days, a bucket of 30 to 60 days, a bucket of 60 to 90 days. And after 90 days, again, banks start considering that loan as a substandard or bad loan, that the loan has been slippage. So, So, these buckets are used to create provision for the banks to save their balance sheet because banks cannot grow without having a solid equity base and equity capital on their balance sheet. So, this is why banks always set aside a percentage of their income statement against bad loans, which we call provisions. So, it is important for you to understand this. And if you subtract provisions, you will come to PBT. If you subtract taxes from PBT, you will come to PAT. Pat is typically seen as a return on assets because if we do Pat upon total assets, then return on assets will come. And if we do RA into financial leverage, then the return on equity of banks will come. So what is important to understand here and why I explained this to you, ROA tree, because when we talk about public sector banks and private sector banks, then the earnings per share or earnings or PAT or ROA or ROE improvement of public sector banks, bulk of it is led by what? Bulk of it is led by lower provisions. Because gross non-performing assets, if you look at this data point here, you will understand once and for all that the gross non-performing assets of public sector banks, in the case of public sector banks, Q2 FI21, the GNP was 9%, which means the bad loans were 9%, which today fell to 3.4% in Q4 FI24. The NPA in banks fell from 2.7% to 0.7%, the provision coverage ratio fell to 2.7%, and the NPA in banks fell to 2.7%. So, it is not like you have created a provision against GNPA, which we call the provision coverage ratio. So, if we do GNPA minus provision, then we get NNPA. So, the provision coverage ratio of public sector banks is 71.6%, 79%. So, this is called credit cost. When we divide the provision by average assets, then we get the credit cost of the banks. So, in the case of public sector banks, the provision side against the bad loan, which is 2.2%, almost 0.6 percentage. If you look at the same data in the case of private sector banks, then in the case of private sector banks, GNPA was not so high. GNPA was 4.1% which has fallen almost today. If you check, then it has fallen from 4.1% to 1.7%. Net non-performing asset has come to 0.4% of 1%. And at this time, the PCR ratio is also running at 75%. And the average credit cost is running at around 0.5%. But why is this very important to understand? is that the non-performing assets or the industry loans that are being improved India is now at its historic best asset quality so from here there is no more scope for improvement so you have to understand that the growth of public sector banks has been good the P-POP growth is also good but the pre-provision operating profit growth of private sector banks that has still beaten public sector banks over the last 3 years so here I will show you the data which will make you understand the P-POP growth In case of PSU banks, the P-POP was around Rs. 437 billion The P-POP is now around Rs. 679 billion over the last 3 years and 3.5 years This will give you an idea Whereas if you look at the P-POP growth in private sector banks From Rs. 397 billion Today, the POP of private sector banks has reached around Rs. 624 billion. In absolute terms, it is 80-85% growth. In the case of public sector banks, it is nearly 50% growth. In terms of operating profits, private sector banks have beaten public sector banks. But because the credit cost of PSU banks was decreasing, the country's loans and balance sheet were good, So, the right back of bad loans also came and the credit cost decreased. In this way, the earnings per share of public sector banks exploded completely. And in the last 3-4 years, 4 times, their net profit has increased. But what you have to understand as an investor from here is that whether this credit cost low cycle will continue or not if even a little credit cost increases then people will think that the operational metrics of these companies that whether the growth is coming or not in operating profits So this is also one of the reasons why private sector banks underperformed because their credit cost reduced but the public sector banks'9% GNP is now 2% Whereas, the GDP of private sector banks was 4% of GNPA 1.7. So, credit cost in absolute terms fell more than that of private sector banks. What is the third reason? That from the last 2-3 years, the foreign institutional investors have been selling a lot in the Indian markets. And what has happened is that, if we talk about banks, then banks, I think, have a contribution of 38-48% in the Nifty Index. So, banks have basically I have taken the brunt of selling If you look at the FII holding in banks You will understand that the FII holding in banks Almost the reduction in FII holding So almost at one time this sector was over owned by the FIIs So there was 42% FII ownership in Q2-FI20 Which is around 28% age in Q4-FI24 So this is also one of the reasons why private sector banks have underperformed Another reason for private sector banks'underperformance is the credit to deposit ratio. If my credit is outstanding, how many deposits do I have to back it up? If I have a deposit of Rs. 100 and a credit of Rs. 100, which I have given as a loan to back it up with a deposit, then my credit to deposit ratio is 100%. Recently, the bad cycle in banks is not on the asset side, but on the liability side. Because again there are multiple avenues, some are doing stock markets, some are putting their real estate in savings, some are doing it somewhere. So what has happened is that the growth rates of the bank's deposit have come back to around 13-14%. But in the middle, it was only 10-11%. So the good banks thought that if our deposit is of Rs. 100, then we can also give a loan of Rs. 105. Because we are reasonably confident that our loans will keep doing well. So we won't have such a liquidity issue. But what happened is that as the growth rate of the deposit is slowing down, the growth rate of the credit in the banks is also slowing down. And what did RBI say? RBI told the banks that they have to bring their credit to deposit ratio of 80-85%. So due to this, what happened is that if you take the example of HDFC Bank, I think just take post merger, then the credit to deposit ratio of HDFC Bank, I think that went somewhere close to a number of 108-210%. So in the case of HDFC Bank, what will have to be done is either increase the deposit growth, and the credit growth is reduced. So, both of these things are happening in the case of HDFC Bank that they have to increase their deposit growth. So, HDFC Bank is increasing the deposit growth at this time and the credit growth is reduced by HDFC Bank at this time. So, if you check, the credit to deposit ratio of HDFC Bank is 104% which should have been between 80-85% and this has happened because of merger. Similarly, if you see in the case of Axis Bank, it is 90%. So, you will see that it is falling from the last 2-3 quarters. So, basically, Axis Bank will either increase the growth of the deposit or decrease the growth of the credit. So, this creates a double whammy that you have to reduce the growth rates and raise the deposits. And you have to raise the deposit at a high cost. Now, we will see the same case in the case of Equitas Small Finance Bank. So, in Q3 FY20, their credit to deposit ratio was 131%. By reducing it, they had to reduce it to 86% by the end of Q4 FY24. And in the last 5-6 quarters, there has been a major reduction. Because again, this is as per RBI, because if your credit to deposit ratio is not less, then liquidity can also be an issue in banks. Because deposit growth in the system is not going that fast. But 80 to 85% is a number which I think RBI governor mentioned multiple times. So a lot of these banks have sort of adjusted for it. Now HDFC bank has not made any adjustment. Maybe it will take one or two years for them to also adjust. But if we look at PSU banks, then because loans were so bad in PSU banks, and they didn't like credit growth for so many years so if you look at the credit to deposit ratio in PSU banks so credit to deposit ratio already in the PSU banks was in 70s to 80 percentage so actually it was a blessing in disguise that deposit growth rate was low so for PSU banks their credit to deposit ratio was already very low it was under 80% right so again here this was an advantage because they didn't have to reduce their loan growth But still, private sector banks'loan growth rates are coming faster. Then we move towards another interesting element, that at what pace is loan growth coming in these sectors? And finally, I mean, businesses. We will see its valuations towards the end. But just before going forward, if you want to understand different industries, if you want to do your financial planning, if you don't want to be the Abhimanyu who gets caught in the peak of a bull run cycle, if you want to learn how sectoral rotation happens, and if you want to learn how you can build your exit system, so all of these things we teach in one SOIC membership. And SOIC membership is an educational course which strives to make you a complete investor. by giving you multiple learnings from the field of fundamental analysis to technical analysis, to valuation-based analysis and to other things as well, where we also give you sectoral analysis. If you want to register for the membership, the link is there in the description below and you can use the coupon code SYCBONUS10, which is valid for the next 48 hours. So, here we see the comparison. So, pre-provision operating for a profit, how much is the growth of the operating profit of banks? So, in FY24, PSU banks had 9% pre-provision operating profit growth. but like bad growth tiyada ki hoti agar aap answer kar payenge to aap this video ko samajh rahe hain secondly yahaan pe agar hum dekhte hai private banks ki 17% ki PIPOP growth thi which is almost twice the rate of public sector banks or small finance bank ki 25% odd ke aspaas PIPOP growth thi which is even higher than the private sector banks right iske saath agar hum dekhte hai credit cost ki jab baat kate hai to credit cost declined 13 basis points for quarter on quarter for like private banks which is 0.13 percentage Whereas for public sector banks, quarter on quarter, credit cost inched up mainly because of Canara Bank and Bank of India where there was a credit cost issue. Finally, if we look at the market share, then the market share of private sector banks in the last 3 years, in FY21, was 35% in outstanding loan. Now it is 41%, so the market share gain is 6%. Whereas PSU banks have lost again market share in outstanding loan from 57% to around 52%. So these things are important to understand because when you understand the reason for underperformance and if slowly those reasons for underperformance get removed then things start looking interesting Now we will see what are the valuations of PSU banks, what are the valuations of private sector banks what are the valuations of SBA what is happening in different private sector banks, what are the risks and finally we will conclude the video So first we will see the valuations of PSU Bank Index So when we see the valuations of PSU Bank Index So if you check here, today the P multiple of the PSU Bank Index is 9.7 times Whereas if we look at the price to book multiple of the PSU Bank Index, today it is 1.6 times Which is probably the highest in the last decade Highest to the highest, if we take only the example of the State Bank of India Because the State Bank of India represents a large share of market caps for PSU banks also If we look at the price to book of State Bank of India, in the peak of the bull run in 2008, it went to almost 3.4 times also. Today, it is 1.8 times because the bank has grown a lot. But again, this bank has traded in the past 2.5, 2.8 and 3 times. When we take an example of PSU banks, State Bank of India is one of the banks which is still riding for 14-15% growth rates in their loan book. And they're guiding for again the ROAs maybe will start inching up over next one or two years. Because in quarter 4, State Bank of India has taken a lot of wage hikes. So the premium of State Bank of India's price to book value versus other PSU banks is 32%. Which was a decade-al average of 116%. Basically State Bank of India used to trade at a premium of 116% versus other PSU banks. But now they're trading at 32-33%. Which is a decade-al average. And State Bank of India still has 18-19% return on equity. So, the ROE of State Bank of India is better than HDFC Bank at the moment. And it is in line with the ROE of ICICI Bank at the moment. So, that gives you a lot of idea of what is going on in this bank. Basically, because NIMs are holding at the moment, Net Interest Margins are not falling. Because if the unsecured loan of these banks was less, then they will increase the unsecured loan a little bit. So, it is not difficult to sustain the Net Interest Margins. And these are deposit franchises. Because the benefit of PSU banks is that it is quasi-government. So if something is quasi-government, people think that it is very safe to deposit here. So in the State Bank of India, these are the characteristics of deposit franchisees. Bank of Maharashtra is also one of the banks which is doing more than 20% return on equity in PSU banks. And they are guiding for a growth rate of 16-20%. So we are discussing these two banks just on the return ratios which have come out best in the sector. But Bank of Maharashtra already... more than 2.5 times price to book trade. State Bank of India also has 1.8 times price to book. So in PSU banks, we have just examples of these two banks filtering on the basis of their return ratios. Let's go to private sector banks. Let's take an example like... What are the issues? Since the merger of HDFC Bank, the credit to deposit ratio has become too big. Since the credit to deposit ratio is still at 104%, I think over the next several quarters, we will see that the deposit growth will start inching up. On the asset side, we may not see much credit growth. Maybe 10-12% type credit growth is seen, so you have to analyze all these things. What is ICICI Bank guiding? Their NIMS might soften or stay flat. If they stay flat, then it will be a hallmark achievement. And now 17-18% ROE can be in the case of ICICI Bank. In the case of Kotak Bank, ROE is the industry best. Why not ROE? Because they don't take financial leverage. And Kotak Bank recently has an RBI embargo. But Kotak Bank is also trading at 2.1-2.3 times price to book, which is the lowest it has ever traded at over the last 6-7 years. If we look at core banking. Then we see a bunch of unsecured lenders or subprime lenders like Chola Mandalam. Chola Mandalam will be a beneficiary if interest rates are cut because their fixed rate loan book is there. When interest rates are reduced, in the reduction of interest rates, HDFC, ICICI, Axis and all these banks'net interest margins will fall because you will have to repricing the loan and deposit eventually. So, you will have a lot of impact on NIMS because their books are on floating rate. I'm very sorry that I'm having to use technical terms here But you'll be able to understand this industry analysis very easily But again, in cases like Chola Mandalam Or for example, the example of Equitas Not a buy or sell recommendation Where there is a fixed rate loan book, if the interest rates are reduced accidentally So what happens is that their NIMs start expanding So this is also one of the angles But let's say, for example, Chola Mandalam, in NBFC pricing power and their NIMs do not collapse so quickly. Same case is in Sriram Finance. And if any other businesses want to study here, Sriram Finance, Chola, HDFC Bank, Kotak, ICICI etc. And we have created this entire list of return ratios of all the banks which is there in the description below. So you can use the entire sheet. In which each and every bank's ROE, ROA, price to book, everything is updated just for you. Finally, if we look at the valuation of private sector banks, So in Bank Nifty, there are more constituents of private sector banks than 70-75% of the date. So if you check what is going on at this time, so now Bank Nifty is running at a P-ratio of 14.99 times, now it has become 15.24 in 2 days. Which on an average was at 19.94, Price to book is running at 2.9, which on an average is between 2.6 to 2.9. And if we look at the price to book of Bank Nifty at peak, so it has also gone to a P-ratio of 15.99. peak level of 4.53 also in the past bull run right so uh 4.53 but anything above 3.1 or 3.2 means that it can go back a little bit to expensive territory right so now on an average if we look at the private bank index which is 2.8 2.9 today so valuations today are average balance sheets are clean one year earnings growth can be of impact to in companies because abhi bohot high nimh ka base thay But it seems that the stock market has taken a lot of a break-in. Now here I will tell you a secret strategy that if you want to spot a turnaround in Nifty Private Banks, then how can you do it? So come to the trading view and follow this simple thing with me that Nifty Private Bank Index divided by Nifty PSU Bank Index and a ratio chart will come out in front of you. On this ratio chart, you can put 21 weekly EMA or 30 weekly EMA. So you can put SOIC students, SOIC LTI or VSTOP. And when it is positive or the ratio chart starts to reverse, then it will mean that the outperformance of private sector banks versus PSU banks has again started. But if it doesn't reverse, then it will mean that the PSU banks are still outperforming. And if you look at this chart from the last 3 years, then you will see that PSU banks have been dominant over the private sector banks. What can be the key risk for private sector banks? Next, we have taken out the Bloomberg estimates, that in the next financial year, that is in FY25, EPS growth for the likes of HDFC, ICICI, Axis and Kotak Bank is estimated that according to Bloomberg estimates, not our estimates, that single digit EPS growth can happen because there were very high net interest margins in FI24 and why oh why likely it will see a decline and along with that the credit cost which was a historic low in FI24 it will also see a comeback in the year of FI25. So you can use these particular estimates to look at what you find interesting and similarly if you look at SBI Bank If we look at the next 1-2 years, the credit cost starts inching up, so what are the earnings estimates? In some of the lower class lenders or the lenders of poor quality, there are still writebacks coming. But this could be a key risk that if the credit cost increases again, and this time there was very low credit cost this year, so it is a low base, it is a very high base because it was the best asset quality. If the asset quality is slightly worse in the next 1-2 years, then it may be possible P&L level pe bohot zyada growth na dekhe. But abhi bhi agar thodi se bhi normalize hoti asset quality, fir bhi asset quality is quite phenomenal and abhi hum credit cost cycle ke through nahi ja rahe, we are going through a liability side cycle. So hopefully you have private sector banks or PSU banks ke differences pada lage. And do let me know in the comment section below ki aapko iss video se kya bohot clarity aayi ki private sector banks kyo underperform kar rahe the because credit cost PSU banks se bhi bohot tezi se gire. And yahaan se kyo operational profit matrix We'll start taking more and more credibility because of credit costs of both can't fall more than here. Thank you so much for watching this video. Whatever your learnings from this business analysis, do tell me in the comment section. With this, I'll see you in the next one. Jai Hind!

So first let's see what has happened in the last 3-4 years. So in the last 3-4 years, if you look at the comparison here So this is data which is from March 2021 So public sector banks The index of private sector banks is up by 311% whereas the index of private sector banks is up by 49.71%. And secondly, if you look at the comparison here, then here we have your Nifty private bank index above and below we have PSU bank index in relative strength. So whenever it goes to green, it means that the private sector banks are outperforming the public sector bank index. the PSU Bank Index is doing much better versus the Private Sector Bank Index.

So since 2021, it has comprehensively been in red. It means that the PSU banks are outperforming the public sector banks. So what are some of the reasons and why we are doing this video? Because it could be that some of those reasons might go away going forward in next 2-4 years.

And how can we assess these two particular indexes from here? And what can happen in private banks and what can happen in public sector banks? We'll find that out in this particular video.

With this, let's start. And first, what we see in the starting is why private banks have underperformed the public sector banks. This is a very important topic to understand.

So one of the key reasons is that if you analyze the profitability here, see that the profit pool of private sector banks has always been good, like their profitability has been growing consistently. If you check from FY18 to now, you will see that nearly the profits of private sector banks have become 3 to 3.5 times, more than 3.5 times. Whereas in the case of public sector banks, if you do a similar analysis, then you will find that in the case of PSU banks, FI16 to FI20, cumulatively, public sector banks were making losses.

That means public sector banks were in a gap between FI16 to FI20. And after that, there was a turnaround where their profitability was nearly 4 times from FI21 to FI24. So one of the key reasons for underperformance of FI21, private sector banks versus public sector banks has been that the public sector sector banks balance sheet cleanup okay country balance sheet cleanup okay because public sector banks still today make up for nearly 53 to 54 percent of the entire outstanding industry loan book so this is one of the reasons and you can see that delta is in high performance because of this second reason which is very important you have to understand what is the role of the ROA tree in the banks So what is ROA tree? Whenever you talk about a company, a company does sales. After sales, the company earns gross profit.

That is, if we remove cost of material, the company earns gross profit. After gross profit, if you remove other expenses, like if the company is doing expenditure in marketing, company is doing expenditure in employees, company is doing expenditure in electricity, then we come to EBITDA. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.

When you subtract depreciation and amortization, you come to EBIT which is Earnings Before Interest and Taxes. When you subtract interest cost, you come to PBT which is Profit Before Tax. When you subtract taxes from PBT, you come to Profit After Tax.

Similarly, what do you do in the case of banks? In the case of banks, you start with the first item which is known as the interest income of a bank. So, what is the interest income of a bank?

The total interest earned by the bank minus the interest it expends. Now, let's come to the interest income. What else do you add from the interest income? The other income, if the bank issues a credit card, the bank earns a fee income. If the bank is giving a loan, the processing fee is earned on the loan.

When you add the other income to the interest income, you come to the total income of a bank. Then, what comes to the total income of a bank? OPEX comes.

So, what do you minus from the total income of a bank? OPEX. So, when we minus OPEX, what does OPEX mean in the case of a bank? In the case of a bank, it means the rent of a branch, the electricity cost, the cost of staff, the cost of IT, right? N number of costs.

So, when we subtract that cost, we come to a thing called PPOP. That is Pre-Provision Operating Profit. So, it is very important to understand PPOP because in the case of banks, operating profit is equivalent to PPOP of banks. So, if someone asks you what is operating profit in banks, then you have to tell them that the PPOP of banks, that is Pre-Provision Operating Profit, is the operating profit of banks. Then, what do we subtract from Pre-Provision Operating Profit?

Provisions. So, it is important to understand that in the case of banks, there are gross non-performing assets and net non-performing assets. So, when you subtract provisions from GNPA, you come to NNPA.

So, GNPA is the gross non-performing assets of banks. So, again, buckets are made in it. There will be a bucket of 1 to 30 days, a bucket of 30 to 60 days, a bucket of 60 to 90 days. And after 90 days, again, banks start considering that loan as a substandard or bad loan, that the loan has been slippage.

So, So, these buckets are used to create provision for the banks to save their balance sheet because banks cannot grow without having a solid equity base and equity capital on their balance sheet. So, this is why banks always set aside a percentage of their income statement against bad loans, which we call provisions. So, it is important for you to understand this. And if you subtract provisions, you will come to PBT.

If you subtract taxes from PBT, you will come to PAT. Pat is typically seen as a return on assets because if we do Pat upon total assets, then return on assets will come. And if we do RA into financial leverage, then the return on equity of banks will come. So what is important to understand here and why I explained this to you, ROA tree, because when we talk about public sector banks and private sector banks, then the earnings per share or earnings or PAT or ROA or ROE improvement of public sector banks, bulk of it is led by what? Bulk of it is led by lower provisions.

Because gross non-performing assets, if you look at this data point here, you will understand once and for all that the gross non-performing assets of public sector banks, in the case of public sector banks, Q2 FI21, the GNP was 9%, which means the bad loans were 9%, which today fell to 3.4% in Q4 FI24. The NPA in banks fell from 2.7% to 0.7%, the provision coverage ratio fell to 2.7%, and the NPA in banks fell to 2.7%. So, it is not like you have created a provision against GNPA, which we call the provision coverage ratio. So, if we do GNPA minus provision, then we get NNPA.

So, the provision coverage ratio of public sector banks is 71.6%, 79%. So, this is called credit cost. When we divide the provision by average assets, then we get the credit cost of the banks.

So, in the case of public sector banks, the provision side against the bad loan, which is 2.2%, almost 0.6 percentage. If you look at the same data in the case of private sector banks, then in the case of private sector banks, GNPA was not so high. GNPA was 4.1% which has fallen almost today. If you check, then it has fallen from 4.1% to 1.7%. Net non-performing asset has come to 0.4% of 1%.

And at this time, the PCR ratio is also running at 75%. And the average credit cost is running at around 0.5%. But why is this very important to understand? is that the non-performing assets or the industry loans that are being improved India is now at its historic best asset quality so from here there is no more scope for improvement so you have to understand that the growth of public sector banks has been good the P-POP growth is also good but the pre-provision operating profit growth of private sector banks that has still beaten public sector banks over the last 3 years so here I will show you the data which will make you understand the P-POP growth In case of PSU banks, the P-POP was around Rs. 437 billion The P-POP is now around Rs. 679 billion over the last 3 years and 3.5 years This will give you an idea Whereas if you look at the P-POP growth in private sector banks From Rs. 397 billion Today, the POP of private sector banks has reached around Rs. 624 billion. In absolute terms, it is 80-85% growth.

In the case of public sector banks, it is nearly 50% growth. In terms of operating profits, private sector banks have beaten public sector banks. But because the credit cost of PSU banks was decreasing, the country's loans and balance sheet were good, So, the right back of bad loans also came and the credit cost decreased. In this way, the earnings per share of public sector banks exploded completely.

And in the last 3-4 years, 4 times, their net profit has increased. But what you have to understand as an investor from here is that whether this credit cost low cycle will continue or not if even a little credit cost increases then people will think that the operational metrics of these companies that whether the growth is coming or not in operating profits So this is also one of the reasons why private sector banks underperformed because their credit cost reduced but the public sector banks'9% GNP is now 2% Whereas, the GDP of private sector banks was 4% of GNPA 1.7. So, credit cost in absolute terms fell more than that of private sector banks.

What is the third reason? That from the last 2-3 years, the foreign institutional investors have been selling a lot in the Indian markets. And what has happened is that, if we talk about banks, then banks, I think, have a contribution of 38-48% in the Nifty Index. So, banks have basically I have taken the brunt of selling If you look at the FII holding in banks You will understand that the FII holding in banks Almost the reduction in FII holding So almost at one time this sector was over owned by the FIIs So there was 42% FII ownership in Q2-FI20 Which is around 28% age in Q4-FI24 So this is also one of the reasons why private sector banks have underperformed Another reason for private sector banks'underperformance is the credit to deposit ratio.

If my credit is outstanding, how many deposits do I have to back it up? If I have a deposit of Rs. 100 and a credit of Rs. 100, which I have given as a loan to back it up with a deposit, then my credit to deposit ratio is 100%. Recently, the bad cycle in banks is not on the asset side, but on the liability side. Because again there are multiple avenues, some are doing stock markets, some are putting their real estate in savings, some are doing it somewhere. So what has happened is that the growth rates of the bank's deposit have come back to around 13-14%.

But in the middle, it was only 10-11%. So the good banks thought that if our deposit is of Rs. 100, then we can also give a loan of Rs. 105. Because we are reasonably confident that our loans will keep doing well. So we won't have such a liquidity issue.

But what happened is that as the growth rate of the deposit is slowing down, the growth rate of the credit in the banks is also slowing down. And what did RBI say? RBI told the banks that they have to bring their credit to deposit ratio of 80-85%.

So due to this, what happened is that if you take the example of HDFC Bank, I think just take post merger, then the credit to deposit ratio of HDFC Bank, I think that went somewhere close to a number of 108-210%. So in the case of HDFC Bank, what will have to be done is either increase the deposit growth, and the credit growth is reduced. So, both of these things are happening in the case of HDFC Bank that they have to increase their deposit growth.

So, HDFC Bank is increasing the deposit growth at this time and the credit growth is reduced by HDFC Bank at this time. So, if you check, the credit to deposit ratio of HDFC Bank is 104% which should have been between 80-85% and this has happened because of merger. Similarly, if you see in the case of Axis Bank, it is 90%. So, you will see that it is falling from the last 2-3 quarters.

So, basically, Axis Bank will either increase the growth of the deposit or decrease the growth of the credit. So, this creates a double whammy that you have to reduce the growth rates and raise the deposits. And you have to raise the deposit at a high cost.

Now, we will see the same case in the case of Equitas Small Finance Bank. So, in Q3 FY20, their credit to deposit ratio was 131%. By reducing it, they had to reduce it to 86% by the end of Q4 FY24. And in the last 5-6 quarters, there has been a major reduction. Because again, this is as per RBI, because if your credit to deposit ratio is not less, then liquidity can also be an issue in banks.

Because deposit growth in the system is not going that fast. But 80 to 85% is a number which I think RBI governor mentioned multiple times. So a lot of these banks have sort of adjusted for it. Now HDFC bank has not made any adjustment. Maybe it will take one or two years for them to also adjust.

But if we look at PSU banks, then because loans were so bad in PSU banks, and they didn't like credit growth for so many years so if you look at the credit to deposit ratio in PSU banks so credit to deposit ratio already in the PSU banks was in 70s to 80 percentage so actually it was a blessing in disguise that deposit growth rate was low so for PSU banks their credit to deposit ratio was already very low it was under 80% right so again here this was an advantage because they didn't have to reduce their loan growth But still, private sector banks'loan growth rates are coming faster. Then we move towards another interesting element, that at what pace is loan growth coming in these sectors? And finally, I mean, businesses. We will see its valuations towards the end. But just before going forward, if you want to understand different industries, if you want to do your financial planning, if you don't want to be the Abhimanyu who gets caught in the peak of a bull run cycle, if you want to learn how sectoral rotation happens, and if you want to learn how you can build your exit system, so all of these things we teach in one SOIC membership.

And SOIC membership is an educational course which strives to make you a complete investor. by giving you multiple learnings from the field of fundamental analysis to technical analysis, to valuation-based analysis and to other things as well, where we also give you sectoral analysis. If you want to register for the membership, the link is there in the description below and you can use the coupon code SYCBONUS10, which is valid for the next 48 hours. So, here we see the comparison.

So, pre-provision operating for a profit, how much is the growth of the operating profit of banks? So, in FY24, PSU banks had 9% pre-provision operating profit growth. but like bad growth tiyada ki hoti agar aap answer kar payenge to aap this video ko samajh rahe hain secondly yahaan pe agar hum dekhte hai private banks ki 17% ki PIPOP growth thi which is almost twice the rate of public sector banks or small finance bank ki 25% odd ke aspaas PIPOP growth thi which is even higher than the private sector banks right iske saath agar hum dekhte hai credit cost ki jab baat kate hai to credit cost declined 13 basis points for quarter on quarter for like private banks which is 0.13 percentage Whereas for public sector banks, quarter on quarter, credit cost inched up mainly because of Canara Bank and Bank of India where there was a credit cost issue.

Finally, if we look at the market share, then the market share of private sector banks in the last 3 years, in FY21, was 35% in outstanding loan. Now it is 41%, so the market share gain is 6%. Whereas PSU banks have lost again market share in outstanding loan from 57% to around 52%. So these things are important to understand because when you understand the reason for underperformance and if slowly those reasons for underperformance get removed then things start looking interesting Now we will see what are the valuations of PSU banks, what are the valuations of private sector banks what are the valuations of SBA what is happening in different private sector banks, what are the risks and finally we will conclude the video So first we will see the valuations of PSU Bank Index So when we see the valuations of PSU Bank Index So if you check here, today the P multiple of the PSU Bank Index is 9.7 times Whereas if we look at the price to book multiple of the PSU Bank Index, today it is 1.6 times Which is probably the highest in the last decade Highest to the highest, if we take only the example of the State Bank of India Because the State Bank of India represents a large share of market caps for PSU banks also If we look at the price to book of State Bank of India, in the peak of the bull run in 2008, it went to almost 3.4 times also. Today, it is 1.8 times because the bank has grown a lot.

But again, this bank has traded in the past 2.5, 2.8 and 3 times. When we take an example of PSU banks, State Bank of India is one of the banks which is still riding for 14-15% growth rates in their loan book. And they're guiding for again the ROAs maybe will start inching up over next one or two years.

Because in quarter 4, State Bank of India has taken a lot of wage hikes. So the premium of State Bank of India's price to book value versus other PSU banks is 32%. Which was a decade-al average of 116%.

Basically State Bank of India used to trade at a premium of 116% versus other PSU banks. But now they're trading at 32-33%. Which is a decade-al average.

And State Bank of India still has 18-19% return on equity. So, the ROE of State Bank of India is better than HDFC Bank at the moment. And it is in line with the ROE of ICICI Bank at the moment. So, that gives you a lot of idea of what is going on in this bank. Basically, because NIMs are holding at the moment, Net Interest Margins are not falling.

Because if the unsecured loan of these banks was less, then they will increase the unsecured loan a little bit. So, it is not difficult to sustain the Net Interest Margins. And these are deposit franchises. Because the benefit of PSU banks is that it is quasi-government. So if something is quasi-government, people think that it is very safe to deposit here.

So in the State Bank of India, these are the characteristics of deposit franchisees. Bank of Maharashtra is also one of the banks which is doing more than 20% return on equity in PSU banks. And they are guiding for a growth rate of 16-20%. So we are discussing these two banks just on the return ratios which have come out best in the sector.

But Bank of Maharashtra already... more than 2.5 times price to book trade. State Bank of India also has 1.8 times price to book.

So in PSU banks, we have just examples of these two banks filtering on the basis of their return ratios. Let's go to private sector banks. Let's take an example like...

What are the issues? Since the merger of HDFC Bank, the credit to deposit ratio has become too big. Since the credit to deposit ratio is still at 104%, I think over the next several quarters, we will see that the deposit growth will start inching up. On the asset side, we may not see much credit growth.

Maybe 10-12% type credit growth is seen, so you have to analyze all these things. What is ICICI Bank guiding? Their NIMS might soften or stay flat.

If they stay flat, then it will be a hallmark achievement. And now 17-18% ROE can be in the case of ICICI Bank. In the case of Kotak Bank, ROE is the industry best. Why not ROE?

Because they don't take financial leverage. And Kotak Bank recently has an RBI embargo. But Kotak Bank is also trading at 2.1-2.3 times price to book, which is the lowest it has ever traded at over the last 6-7 years.

If we look at core banking. Then we see a bunch of unsecured lenders or subprime lenders like Chola Mandalam. Chola Mandalam will be a beneficiary if interest rates are cut because their fixed rate loan book is there.

When interest rates are reduced, in the reduction of interest rates, HDFC, ICICI, Axis and all these banks'net interest margins will fall because you will have to repricing the loan and deposit eventually. So, you will have a lot of impact on NIMS because their books are on floating rate. I'm very sorry that I'm having to use technical terms here But you'll be able to understand this industry analysis very easily But again, in cases like Chola Mandalam Or for example, the example of Equitas Not a buy or sell recommendation Where there is a fixed rate loan book, if the interest rates are reduced accidentally So what happens is that their NIMs start expanding So this is also one of the angles But let's say, for example, Chola Mandalam, in NBFC pricing power and their NIMs do not collapse so quickly. Same case is in Sriram Finance. And if any other businesses want to study here, Sriram Finance, Chola, HDFC Bank, Kotak, ICICI etc.

And we have created this entire list of return ratios of all the banks which is there in the description below. So you can use the entire sheet. In which each and every bank's ROE, ROA, price to book, everything is updated just for you.

Finally, if we look at the valuation of private sector banks, So in Bank Nifty, there are more constituents of private sector banks than 70-75% of the date. So if you check what is going on at this time, so now Bank Nifty is running at a P-ratio of 14.99 times, now it has become 15.24 in 2 days. Which on an average was at 19.94, Price to book is running at 2.9, which on an average is between 2.6 to 2.9. And if we look at the price to book of Bank Nifty at peak, so it has also gone to a P-ratio of 15.99. peak level of 4.53 also in the past bull run right so uh 4.53 but anything above 3.1 or 3.2 means that it can go back a little bit to expensive territory right so now on an average if we look at the private bank index which is 2.8 2.9 today so valuations today are average balance sheets are clean one year earnings growth can be of impact to in companies because abhi bohot high nimh ka base thay But it seems that the stock market has taken a lot of a break-in.

Now here I will tell you a secret strategy that if you want to spot a turnaround in Nifty Private Banks, then how can you do it? So come to the trading view and follow this simple thing with me that Nifty Private Bank Index divided by Nifty PSU Bank Index and a ratio chart will come out in front of you. On this ratio chart, you can put 21 weekly EMA or 30 weekly EMA. So you can put SOIC students, SOIC LTI or VSTOP. And when it is positive or the ratio chart starts to reverse, then it will mean that the outperformance of private sector banks versus PSU banks has again started.

But if it doesn't reverse, then it will mean that the PSU banks are still outperforming. And if you look at this chart from the last 3 years, then you will see that PSU banks have been dominant over the private sector banks. What can be the key risk for private sector banks?

Next, we have taken out the Bloomberg estimates, that in the next financial year, that is in FY25, EPS growth for the likes of HDFC, ICICI, Axis and Kotak Bank is estimated that according to Bloomberg estimates, not our estimates, that single digit EPS growth can happen because there were very high net interest margins in FI24 and why oh why likely it will see a decline and along with that the credit cost which was a historic low in FI24 it will also see a comeback in the year of FI25. So you can use these particular estimates to look at what you find interesting and similarly if you look at SBI Bank If we look at the next 1-2 years, the credit cost starts inching up, so what are the earnings estimates? In some of the lower class lenders or the lenders of poor quality, there are still writebacks coming. But this could be a key risk that if the credit cost increases again, and this time there was very low credit cost this year, so it is a low base, it is a very high base because it was the best asset quality.

If the asset quality is slightly worse in the next 1-2 years, then it may be possible P&L level pe bohot zyada growth na dekhe. But abhi bhi agar thodi se bhi normalize hoti asset quality, fir bhi asset quality is quite phenomenal and abhi hum credit cost cycle ke through nahi ja rahe, we are going through a liability side cycle. So hopefully you have private sector banks or PSU banks ke differences pada lage. And do let me know in the comment section below ki aapko iss video se kya bohot clarity aayi ki private sector banks kyo underperform kar rahe the because credit cost PSU banks se bhi bohot tezi se gire. And yahaan se kyo operational profit matrix We'll start taking more and more credibility because of credit costs of both can't fall more than here.

Thank you so much for watching this video. Whatever your learnings from this business analysis, do tell me in the comment section. With this, I'll see you in the next one.

Jai Hind!

Transcript for:Private vs Public Sector Banks Analysis

Transcript for:
Private vs Public Sector Banks Analysis