Private Banks Stocks Outshine PSU Peers In FY27

'Banking is the only sector that can see double-digit growth in FY27.'

Stocks of private banks have had a good run in FY27, with the Nifty Private Bank index surging nearly 17 per cent compared to the Nifty 50 that is up 8.4 per cent.

The index has also outperformed the Nifty PSU Bank index (up 7.5 per cent) and Nifty Bank index (15.6 per cent) in FY27, according to data from ACE Equity.

Analysts attribute private banks' performance to asset quality, business prospects, treasury gains, and the Reserve Bank of India (RBI) pushing concessional swap facilities for FCNR (B) deposits and external commercial borrowings (ECBs).

Analysts at Kotak Institutional Equities (KIE) are positive about leading private banks. They believe that the pressure of net interest margin (NIM) could ease as "competitive intensity" eases.

Public sector banks (PSBs), which once leveraged surplus deposits to beat their private peers, are now increasingly relying on costlier term deposits to fund incremental growth.

The new strategy potentially requires higher deposit rates and narrows PSBs' funding advantage, KIE said.

'Secondly, strong FCNR deposit mobilisation could ease system-wide funding pressures and moderate deposit costs. While all banks stand to benefit, the impact is likely to be disproportionately favourable for private banks, given their funding mix and deposit franchise,' said M B Mahesh, Ashlesh Sonje and Nikhil Suresh of KIE in a recent note.

Bandhan Bank, YES Bank, IDFC First Bank, IndusInd Bank, and RBL Bank from the private sector have gained up to 50 per cent in FY27 at the bourses.

Among PSBs, Bank of Maharashtra, Punjab & Sind Bank and UCO Bank have rallied up to 35 per cent, ACE Equity's data show.

While announcing the monetary policy on June 5, the RBI introduced measures to encourage overseas capital inflows.

These include a US dollar-rupee forex swap facility at par for fresh FCNR (B) deposits and a concessional swap facility for eligible ECBs and overseas foreign currency borrowings.

FCNR (B) deposits worth nearly $8 billion have already flowed in since then, with State Bank of India alone mobilising over $1.5 billion, reports said.

Most PSBs are offering interest rates of 6-6.5 per cent on such deposits and smaller private banks up to 7.5 per cent.

Margins Softening

Numbers for the first quarter of FY27 are likely to show soft margins across banking, but private banks will be the first to show that the NIM trough is behind them, according to Anirudh Garg, fund manager & partner, INVasset PMS.

"Deposit repricing is largely done, FCNR (B) flows should ease the funding gap from the second quarter, and if the RBI's next move is a hike rather than a cut, repo-linked books reprice up fastest. PSU banks are more a second-half story," Garg said.

"Once the OFS (offer for sale) overhang clears post-August and their margins bottom out, valuations at well below private sector multiples with mid-teen ROE (return on equity) becomes hard to ignore. So, private banks lead for now, but I wouldn't write off PSBs. The gap is cyclical, not structural," he said.

G Chokkalingam, founder and head of research at Equinomics Research, expects a 15 to 20 per cent return from private bank stocks in the next 12 months, provided the overall market sentiment is supportive.

"Business updates from the private lenders, such as HDFC Bank, have also supported sentiment in the last few weeks," Chokkalingam said.

"Banking is the only sector that can see double-digit growth in FY27. The only risk is a deficient monsoon that can dent credit off-take and rekindle inflation concerns."

Feature Presentation: Aslam Hunani/Rediff