Asset quality favours private sector banks over PSBs

Buffeted by the economic slowdown that shows no sign of revival and interest rates that remain perched high due to stubborn inflation, the financial sector stocks continue to bleed.

Many of the top PSU bank stocks have shed in a year close to 30-50 per cent in value over fears of rising NPA, high provisioning, and in case of banks such as SBI, the suspense over the timing and mode of fresh capital infusion.

Though the private sector bank stock prices may have generally shed less, they are nevertheless significant, particularly in case of banks such as Axis Bank and ICICI Bank.

Many of the PSU banks such as SBI sit on a mountain of real estate whose value at present rates could be colossal. Moreover, banks such as SBI, Bank of Baroda, Canara Bank and Union Bank of India have ventured into activities such as insurance or MF or capital markets whose true value would be realised when they are listed.

General advice

A common thread of advice from market analysts is that investing in private sector bank stocks is preferable compared to PSU bank stocks. .

The wild swings the bank stocks witnessed today due to RBI policy review may make investors cautious regarding their investment decisions in financial stocks. Mr Rikesh Parikh, Vice-President — Markets Strategy and Product Development (Equities), Motilal Oswal Securities Ltd, said the asset quality was the main reason for favouring private sector banks to PSU banks. The gross and net NPA additions in case of PSU banks have been “higher largely due to relatively high exposure to telecom, power and agriculture sectors” and private banks are scaling up on relatively higher growth rate compared to PSU (banks).

At attractive levels

Mr Parikh said “recent correction in the market prices do make most of the PSU bank (stocks) look positive on valuation basis.” But the “conviction in them will come once we see RBI change in policy decision for a pause” and also fall in inflation rate could trigger investment momentum in PSU banks.

On the reasons for the high market cap (in dollar term in billions) of private banks compared to PSU banks, he said private banks were proactive in raising capital at favourable times through QIB, follow-on-offer, etc, leading to better capital adequacy and higher book value.

However, in case of PSU banks, they have to take government approvals which might lead to time lag.

Also, private sector banks command premium valuation as their growth rates are higher, control on cost and assets quality (better) (lower NPA).

The real estate value is not taken into consideration while valuing banks as they just provide comfort when stocks are beaten down.

Mr Parikh said, private sector banks have been able to expand their subsidiaries, that is, insurance, mutual funds, etc, and are leaders in those businesses.

But in case of PSU banks, except SBI, no other bank has been able to make a big impact.

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