Private Banks Outshine PSUs with Superior Valuation Comfort, Says Systematix

In its latest report, Systematix says that private banks provide better valuation comfort compared to public sector banks (PSU). While PSU banks might perform better in the short term due to factors like lower credit-deposit ratios and high wage bills from FY24, private banks are expected to deliver superior risk-adjusted returns in the medium to long term. This is because of their deeper reach in semi-urban and rural areas, conservative lending practices, and the use of technology to improve efficiency.

FY25 Performance Expectations

For FY25, PSU banks are likely to see better operating profit growth than private banks. However, private banks like Kotak and HDFC Bank, as well as mid-sized banks like IndusInd Bank, are currently trading at lower valuations than their historical averages due to some short-term concerns. As these banks address their issues, their valuation multiples should improve, leading to better stock returns, along with an estimated 14% annual growth in adjusted book value per share (ABVPS) over FY24–26.

Current Valuations of PSU Banks

PSU banks, on the other hand, are generally trading at 1.1 times their forward ABVPS against a forward return on assets (RoA) of 1.0–1.1%. This reflects comfort in their credit-deposit ratios, net interest margins, normalized operating expenses, and potential for recoveries, although at a slower pace.

Despite strong performance from SBI this year, its premium over other PSU banks is at 32%, much lower than its ten-year average of 116%. Based on these factors, Systematix prefers IndusInd Bank, HDFC Bank, SBI, Kotak Mahindra Bank, Federal Bank, ICICI Bank, and Axis Bank, in that order.

Individual Bank Highlights

IndusInd Bank is highlighted for its strong earnings growth potential. HDFC Bank is noted for its attractive valuation and expected profitability improvements. SBI is recognized for overall profitability improvement and expected earnings growth in FY25/26 after the wage hike in FY24. Federal Bank is seen positively after RBI’s acceptance of the new MD candidate. Kotak Mahindra Bank is valued attractively with expectations of lifting RBI restrictions, similar to HDFC Bank. ICICI Bank’s recent underperformance is linked to modest earnings growth projections for FY25. Axis Bank’s stock has limited upside after recent results.

Systematix gives a ‘buy’ rating to HDFC Bank with a target price of ₹1,885, as well as to Axis Bank (₹1,270), ICICI Bank (₹1,275), SBI (₹950), Kotak Mahindra Bank (₹1,815), and IndusInd Bank (₹1,875). Federal Bank is rated ‘hold’ with a target price of ₹190 per share.