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MUMBAI – Private banks, which have always been the favourites of institutional investors, lost the spot to public sector banks who are touching the sky riding on retail bulls.

So far in 2024, all public sector banks have given double-digit returns to investors. On the contrary, private sector banks have seen single to double-digit fall in share prices.

Among the worst hit is sector heavyweight HDFC Bank, whose shares have corrected nearly 17% and this was largely triggered by the earnings downgrades post the December quarter results.

At a time when there are growing concerns over the froth in the midcap and smallcap segments, investors are being advised to shift money to blue chips. However, if one looks at the FII data, then they have sold financial stocks relentlessly in the last two months, pulling out nearly Rs 40,000 crore.

Given that FPI concentration is high in the financial sector, and particularly in private banks, the sharp fall in the stocks clearly shows from where the big bucks were pulled out.

Arguing that the proverbial Goldilocks period is over for the financial sector, global investment bank Goldman Sachs recently issued a “sell” call on retail favourite YES Bank, while downgrading ICICI Bank to “neutral” from “buy”.

The investment banker cited three major headwinds for the financial sector – rising pressure on the cost of funds due to structural challenges in the funding environment, growing concerns on rising consumer leverage, and pressure on operating costs.

While private banks are out of the radar, public sector banks are having a jolly ride. Second rung banks like Indian Overseas Bank, Punjab & Sind Bank, UCO Bank, Bank of Maharashtra, and

Punjab National Bank have rallied 35-47% so far in the calendar year.


From a valuation standpoint, while private banks are trading at a price-to-book (P/B) valuation of 2.3x against the 10-year average of 2.5x, PSU banks are at 1.2x against the long-term average of 0.8x.

“Over the last few years, PSU RoEs dipped primarily due to the drag from PSU banks among others. However, the sharp earnings turnaround on asset quality improvements and attractive valuations contributed to PSU banks’s positive stock performance and earnings upgrade,” said Kedar Kadam, director – listed investments, Waterfield Advisors.

However, most money managers have turned a bit cautious on the overall PSU space, and therefore, public sector banks are no exceptions.

“Given the sharp rally in these stocks, current valuations warrant caution as the tide has lifted all the boats,” Kadam said.

Sharing a similar thought, Amnish Aggarwal of Prabhudas Lilladher too suggests that incrementally one should be cautious in the PSU space at this point.

“The kind of return we have seen will not be there, but many of them will still give you steady returns incrementally from here on,” Aggarwal said.

The question now is will and when the euphoria around PSU bank stocks will end.

As for the private banking space, analysts are being highly selective here and one stock that they are keeping their faith on despite the massive underperformance is HDFC Bank.

Given most of the large and mid-sized private banks are trading in a close valuation band, Goldman Sachs believes that visibility on loan growth, PPOP-ROA and credit quality will play an important role in the near term.

However, it has retained its “buy” rating on HDFC Bank with a price target of Rs 1,915, while Bernstein has held on to its “outperform” rating.

(Data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

  • Published On Mar 14, 2024 at 11:00 AM IST

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