Improved data keeps Street positive on public sector bank shares

Public sector banks (PSBs) have delivered significant outperformance in the last three years and the sector has been reassessed.

Given growth and profitability expectations of a return on equity (RoE) of 18 percent in FY24-26, there is still reason to buy at current levels.

While net interest margins or NIMs may remain within a range or trend downward, there is optimism about potentially better operating ratios and lower non-performing assets (NPAs), plus room for further credit cost reductions, and healthy government bond performance as interest rates to rise. trend downwards.

Moreover, PSBs are raising capital and have stronger CAR (Capital Adequacy Ratios), indicating their desire to expand lending as the business cycle progresses.

In FY23 and FY24 (seven quarters of two fiscal years), they reported higher profits than in the previous decade ending FY22.

Historically, private banks have always been preferred due to their larger market share, better asset quality and higher return ratios.

While the market share of PSBs (both in deposits and advances) has declined, the pace of market share erosion in loans has slowed significantly.

Recent fund increases and stronger balance sheets have contributed to healthy lending growth.

In FY23, PSBs experienced loan growth of 17 per cent, almost the same as private banks’ 18 per cent. PSBs also have low credit deposit (CD) ratios and ample liquidity, and therefore credit growth should be robust.

In terms of asset quality, PSBs have shown dramatic improvement. Gross NPAs peaked at 14.6 percent in March 2018 and declined to 3.7 percent in FY24 (December 23).

Overall PCR is estimated to improve from 48 percent in FY18 to 78 percent in FY24.

The net NPA ratios of 0.8 percent can be broadly comparable to private banks, and this means lower credit costs.

However, PSBs still have a higher aggregate gross NPA ratio of 3.7 percent (private banks are around 2 percent) and a much larger total technically amortized (TWO) pool, totaling over ~10.5 trillion.

As the business cycle improves, there has been a significant recovery from the pool, which has increased revenues and reduced provisions.

This recovery rate could decline in the second half of Year 25 and 26.

However, analysts see growth in the mid-teens or better year-on-year (year-on-year) growth for the larger PSBs in FY25 over FY24.

Some of these estimates are based on the fact that the RBI will change its currently tight liquidity policy in the future. Until that happens, the NIMs will be compressed.

The central bank’s recent increase in risk weights on the unsecured lending segment could also lead to a moderation in growth rates in that segment.

However, these are minor caveats given the strong positives in terms of higher CAR, higher return ratios and better asset quality, as well as the strong growth rates.

The Nifty PSU Bank index has risen 65 percent in the past 12 months and hit an all-time high this month before correcting 6.5 percent.

Since FY21 to March 24, the total market capitalization of PSBs has increased from ~5.5 trillion to ~16.5 trillion. The consensus remains optimistic about the sector.

First print: March 22, 2024 | 10:19 PM IST