The spectacular return of public sector banks

India’s public sector banks turned a corner in 2022 after years of cleaning up their balance sheets and ridding themselves of large toxic assets.

Armed with better capital metrics, these banks are getting back to lending to corporates and upping the ante in the retail segment in an attempt to reclaim market share lost to private peers in the past four to five years. The strong performance has resulted in equity markets supporting the share prices of these state-run lenders.

In the September quarter, the aggregate profit of a dozen public sector banks stood at ₹25,685 crore, as against ₹32,428 crore of 20 private sector lenders.

In FY15, the total profit of private sector banks overtook that of their public sector peers for the first time ever. The gap has widened since although PSU banks are in much better shape at the moment.

Suresh Ganapathy, head of financials research (equity research) at Macquarie Capital pointed out in a note that in the past three years, public sector lenders have been losing market share, especially in current and savings account deposits (Casa).

However, state-owned lenders are still ahead of their private counterparts with regard to market share in loans, although they have ceded a fair bit of share. From 70% in 2016, it now stands at 54.8% of aggregate outstanding loans.

“The PSB turnaround story is finally being recognized by the market—PSB stocks were 8 out of the top 10 performers in the past three months,” analysts at BofA Securities said in a note.

BofA analysts expect this turnaround to be supported in both operational and stock performance terms for several reasons. First, the current environment of tight liquidity and benign asset quality is more beneficial for PSBs. Second, the improvements in return on asset and return on equity has further tailwinds in FY24. Third, valuation discounts are expected to narrow further, both within PSBs and relative to private banks.

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