Public Sector Banks Poised for Near-Term Growth in Loans, Says DSP Mutual Fund Expert

Banking Sector at an Inflection Point

The country's banking sector is at a critical juncture, with public sector banks (PSBs) surpassing private banks in loan growth and market share. According to DSP Mutual Fund's BFSI fund manager, Preethi RS, PSBs will continue to outperform in the near term, driven by their ability to compete aggressively in home, corporate, and auto loan segments.

PSBs' Strong Capital Adequacy and Digital Capabilities

The historical advantage of private banks in terms of efficiency and convenience has narrowed, as PSBs have strengthened their capital adequacy and invested in digital capabilities. This has enabled PSBs to price loans more aggressively, resulting in market share gains in corporate loans, home loans, and auto loans.

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Credit Growth and Deposit Divergence

Credit growth has outpaced deposit growth in recent quarters, a divergence that may not be sustainable in the long term. Historically, credit growth and deposit growth have converged at around 10% growth rate. However, the current divergence is driven by factors such as increased cash in circulation, balance of payments stress, and government balances parked with the RBI.

Outlook for Bank Margins and Earnings

The war in West Asia has resulted in a recalibration of expectations for margin expansion, with net interest margins (NIMs) now expected to remain flat rather than expand over the next two to three quarters. Investors should watch for commentary on how banks will navigate this uncertain macro environment.

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Valuation Opportunities

Private banks have seen massive corrections in valuations, and are now trading at fair multiples. However, select niche non-banking financial companies (NBFCs) and smaller banks are available at attractive valuations, although adjusted for growth. These entities may bear more pain if the war persists.

Key Figures:

• PSBs' market share gains: 2-3 quarters
• Private banks' ROA: 2%
• PSBs' ROA: 1%
• Credit growth: 10% (historically)
• Deposit growth: 10% (historically)
• NIMs: flat over the next 2-3 quarters
• Valuation multiples: fair multiples for private banks