Private Banks Poised for Recovery Despite Challenges, Offering Investment Opportunity

Private banks are anticipated to see improvements in cost-to-income ratios as operating leverage comes into effect amidst ongoing challenges. Analysts predict steady fee growth and stable credit costs, supporting return metrics (RoAs/RoEs) comparable to March 2023 levels through FY26. As a result, private bank valuations, which have corrected significantly, present an attractive risk/reward proposition for investors interested in the banking sector.

In recent times, private sector banks have faced relative underperformance compared to public sector counterparts, with the Nifty Private Bank index lagging significantly behind the Nifty PSU Bank index by margins ranging from 70.4% to 141.8% over one- and two-year periods, respectively. Public sector banks (PSBs) have notably achieved remarkable growth during this period.

Challenges such as competitive deposit mobilization and concerns over stretched Loan-to-Deposit Ratios (LDRs) have impacted private banks’ performance. Additionally, regulatory actions by the Reserve Bank of India (RBI) on select lenders due to compliance issues have affected overall sector performance.

Despite challenges in liabilities mobilization and elevated deposit rates, private banks have shown resilience in managing liquidity, with robust deposit growth rates surpassing advances growth. Anticipated rate cuts by the RBI are expected to alleviate liquidity constraints and mitigate concerns over Net Interest Margins (NIMs).

Asset quality has remained steady overall, with declines in Gross Non-Performing Loans (GNPLs) and Net Non-Performing Loans (NNPLs) from March FY23 levels. Banks have benefited from recoveries related to pandemic-related stressed assets, keeping credit costs in check.

A significant development impacting the banking sector is the recent RBI draft guidelines on provisioning for loans to projects under implementation, which could affect banks’ lending decisions and loan pricing adjustments, particularly for PSBs with exposure to such projects.