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Private Banking Stocks May See Renewed Interest

According to the latest trade reports, a buoyant and renewed interest is being seen in banking stocks, having faced a period of exile and disinterest for quiet sometime.

However, trade analysts at Kotak Securities are being more bullish towards private sector banks, with only a selective interest in PSU space.


What impacts the performance of a banking stock?

There are several factors which determine the performance of banking stocks – private and PSU banks both.

Essentially, there exists an inverse relationship between interest rate and banking stock performance – when interest rates are tightened, banking stocks tend to underperform the market, and vice versa. Lately, after Reserve Bank of India (RBI) indicated a rise in interest rates, there has been a growing increment in banking stocks.

Furthermore, considering that the rate cycle and asset quality remain on the favourable side of things, banking stock prices may move further up in the near future.


Private sector vs public sector banks

When trying to gauge the potential of stocks of private banks with respect to PSU banks, few factors have to be kept in mind.

Firstly, private banks and PSU banks are structurally different and their depths of reach and obligations are relatively different in nature. While PSU banks are more interleaved with activities concerning primary sectors like infrastructure, textiles, iron & steel, commercial real estate and agriculture, private banks have maintained a retail focus.

Sectors to which PSU banks have lent aggressively to have been underperforming, largely because of lack of government sanctions and government clearances, and this has caused a greater stress on the stocks pertaining to PSU banks.

Private sector banks, on the other hand, deal with sectors where risk on asset quality is low.

Also, agriculturally, private sector banks are better placed as their direct exposure to the segment is much less than their PSU counterparts. And because they have deliberately stayed away from the small farmer segments that are more exposed to debt waiver schemes, the perceived risk has been further mitigated.

Therefore, in comparison to private banks, PSU banks are more likely to see a higher pressure on their earnings.


Growth prospect of public sector and private sector banks

With respect to growth, Kotak Securities believes that while PSUs cater to the core industries of the country, they themselves are in need of a capital influx to meet future growth prospects. Government of India owns majority stake in PSU banks, and it will be the one required to infuse capital to meet minimum capital requirement specified under banking regulatory norms.

So, PSU banks (like SBI) will most likely see capital infusion, going forward. It is definitely positive in terms of sentiments as capital is needed for balance sheet growth. Nevertheless, private sector banks are still better placed and continue to report better results in terms of quality while overall results for PSU banks (in terms of quality) has not been very encouraging.



This article has been guest written by Kotak Securities, and does not necessarily represent the views of

Kotak Securities is one of India’s leading stock broking firms offering stock trading, mutual fund and IPO investing services along with a research division specializing  in Sectoral research and Company Specific Equity Research.

Kotak Securities Limited (KSL) may have taken proprietary long/short position in the above mentioned scrips and therefore should be considered as interested. Analyst holding: Nil. The views provided herein are general in nature and does not consider risk appetite or investment objective of particular investor; readers are requested to take independent professional advice before investing. This should not be construed as invitation or solicitation to do business with KSL.

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