HSBC says its time to buy private sector banks over public sector banks based on better bottom-line performance, quality of growth, higher margins
HSBC Global Research says the time is right for private banks to start outperforming PSUs. In a report dated 11th November, it underscores this proposition by pointing out the difference in the bottom line performance in Q2FY11(in its coverage universe) between private and public sector banks. While private banks grew 30%, PSU banks grew just 8%.
The second thing going for private banks, the report says, is that while asset quality pressures will continue and top line growth will moderate for PSU banks, the opposite will happen for private banks. Some other parameters on which private banks score over PSUs, HSBC says, are:
- Loan growth is trending sharply upwards for private banks.
- Margins are higher.
- Gross non-performing loans (NPLs) are on the decline, which will lead to lower provisioning pressure.
- Return on Assets (RoAs) are higher.
- Higher deposit growth.
- Higher CASA (current account savings account ratio).
- Higher loan-to-deposit ratio.
The report also points out that while "earnings growth at 25% CAGR from
FY10-13e and ROA expansion are similar for both PSU and private banks, the
contributors are quite different. While margin and fee growth are the
drivers for private banks, it is mainly lower provisions driving PSU banks."
Another point that is in favour of private banks, HSBC believes, is that PSU
banks have shown a 60% YTD outperformance over private banks and they now trade at 10-year high multiples (private banks are still at about their five-year averages). Hence, there is scope for private banks to rise higher.
Incidentally, some areas where PSUs score over private banks, HSBC says, are:
- Slightly lower cost of funds, and
- Higher RoE.
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).
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