India’s banking stocks have diverged sharply over the past year. Public sector banks (PSU) have outperformed private banks, driven by improving fundamentals. However, valuations for PSU banks have become stretched, while private lenders are trading near multi-year lows. Concerns such as fraud issues and leadership resignations have pressured private banks, prompting experts to consider them for potential upside.
Nomura noted that PSU banks have reversed their loss of market share, achieving a 14.4 percent CAGR in loans post September 2024. Asset quality concerns have eased, with credit costs for PSU banks converging with those of large private banks. Profitability metrics have also improved, with most PSU banks delivering return on assets over 1 percent since FY23.
Despite this, analysts caution that the easy gains for PSU banks may be over. Concerns include the sustainability of loan growth and the quality of earnings, as a significant portion of profits has come from non-core income streams. In contrast, private banks are now seen as a value play, trading at around two times one-year forward book value, below their long-term average.
Stocks like HDFC Bank and Kotak Mahindra Bank are trading below historical valuation multiples, suggesting much of the downside may already be priced in.
