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PSU Banks Gain Favor as Private Bank Premiums Vanish
28 Jul
Summary
- Foreign investors reduced holdings in top private banks over the past year.
- Investor focus has shifted towards select public sector lenders.
- Performance gaps between public and private banks are closing.
Over the past year, foreign institutional investors (FIIs) have notably decreased their holdings in top private banks in India, such as HDFC Bank, Kotak Mahindra Bank, ICICI Bank, Axis Bank, and IndusInd Bank. Concurrently, FIIs have increased their stakes in several public sector lenders, including Bank of Maharashtra, Bank of India, and Bank of Baroda. This trend reflects a narrowing performance gap between public and private sector banks, leading to diminished valuation premiums for private institutions.
Analysts attribute this shift to the improved asset quality, underwriting, and loan growth observed in public sector banks, which were once perceived as underperformers. Some private banks have faced challenges due to increased competition, leading to lower spreads on retail loans. This has prompted investors to focus on individual bank performance rather than simply sector classification.
The positive performance of public sector banks is also evidenced by the Nifty PSU Bank index's rise of 14.42% since July 1, 2024, outperforming the private bank index's 4.51% growth during the same period. Factors such as improved profitability, better return on equity (RoE)—with aggregate PSU RoE at 15% compared to private banks' 12%—and regulatory improvements have contributed to their increased appeal among foreign investors.
