PSBs down, pvt banks set for comeback: Bernstein – Image for illustrative purposes only (Image credits: Unsplash)
Private sector banks have already pulled ahead of their public sector peers by 15 percent since May 2024. That performance gap has caught the attention of analysts at Sanford C. Bernstein, who now see the advantage widening further in the months ahead. The shift comes as public sector banks face tighter limits on lending while private players maintain stronger deposit momentum and more attractive valuations.
Loan Growth Reversal Takes Hold
Public sector banks posted faster loan expansion than private banks in the most recent full financial year, marking the first such outperformance in 14 years. Yet Bernstein analysts expect that trend to reverse quickly. Public sector lenders have largely used up their excess liquidity buffers, leaving future growth dependent on slower deposit inflows that trail those of private competitors.
Private banks, by contrast, continue to attract deposits at a steadier pace. This structural edge allows them to sustain higher lending volumes without the same funding constraints. The result, according to the firm, is a widening gap in loan growth that favors the private sector over the next 12 to 18 months.
Valuations and Returns Favor Private Players
Both segments deliver comparable returns on equity, but private banks trade at lower multiples. Bernstein highlights this combination of similar profitability with cheaper entry points as a key reason to favor the private group. Investors have already begun rotating back into these names, reinforcing the momentum.
Public sector banks, meanwhile, carry higher valuations relative to their growth outlook. The firm notes that this premium leaves less room for upside once deposit pressures intensify and liquidity advantages fade.
Broader Sector Implications
The preference extends beyond pure banks. Bernstein also sees limited appeal in non-banking financial companies at current levels, directing attention instead toward large private lenders such as HDFC Bank, ICICI Bank, and Axis Bank. These institutions benefit from diversified portfolios and stronger balance-sheet flexibility.
Asset quality remains stable across the sector, with no immediate signs of deterioration. Still, the firm cautions that public sector banks will need to navigate tighter funding conditions while private banks capitalize on renewed investor interest.
Outlook for Investors
“We think the public sector banks will underperform the private sector banks simply because their loan growth will now be constrained by their deposit growth,” Bernstein’s India financials head Pranav Gundlapalle has noted. That assessment points to a clear near-term tilt toward private banks.
Market participants watching the sector will likely monitor deposit trends and valuation spreads closely. The current setup suggests private banks hold the stronger hand for sustained outperformance.
