The country's private banks have been visible for their potential, but the stock market may have missed out on the positive changes in state-owned banks, says a research report, adding that this could lead to the outperformance of private banks by public sector banks in the market.
The Indian banking landscape is set for a big-bang of mergers and acquisitions shortly with foreign banks likely to become more active, consequent to the liberalisation of banking guidelines under the World Trade Organization's (WTO) agreements and as a result, small private banks could become takeover targets, said Mumbai-based Khandwala Securities, which brought out the report.
In anticipation of this and also on account of their performance, valuations of private banks have run up, rendering public sector banks (PSBs) look very cheap, particularly when they have done exceedingly well on various performance parameters, says the report.
By their sheer size, pan-India presence and positive equations with the regulator, however, PSBs are better positioned to consolidate and compete with foreign banks in more challenging times, the report points out.
According to the report, the valuation gap between the PSBs and private sector banks seems to be at historically high levels. However, upon figuring out the figures behind this disparity, there are reasons to believe that this gap is likely to narrow down shortly, making the case bullish for PSBs. The analysis reveals that the poor perception of PSBs is not justified when the numbers speak for themselves.
For instance, at target prices a year ahead, the combined market capitalisation of the sample top 6 PSBs (namely Bank of Baroda, Bank of India, Canara Bank, Oriental Bank, Punjab National Bank and State Bank of India) is expected to climb about 36 per cent, while that of the top three private banks covered in the report (namely Axis Bank, HDFC Bank and ICICI Bank) is likely to rise by about 15 per cent. With regard to total credit market share, the data shows that the top 10 PSBs have a combined share of 56 per cent, while the top 8 private banks have a share of only 18 per cent in the total banking credit. But these private banks together enjoy 30 per cent higher market capitalisation than PSBs.
In net non-performing assets (NPAs) as well, the PSBs compare well with private banks. The sample PSBs have net NPAs in the range of 0.49 to 1.56 per cent, while net NPAs of private banks are in the range of 0.43-1.98 per cent.
The report says public sector banks have improved their market share and also asset quality in the past few years, significantly trimming down their operating expenses. The operating expenses as percentage of total assets for PSBs have consistently declined from 2.72 per cent in FY01 to 1.77 per cent in FY07, while that for the new private banks has risen from 1.75 per cent to 2.11 per cent during the same period.