In the world of finance, comparing the performance of different sectors and institutions is crucial for investors in making informed decisions. One such comparison is between the Public Sector Undertaking (PSU) banks and private banks in India. In this article, we will delve into the comparative chart of Nifty PSU banks and Nifty private banks to understand their performance over the years.
The comparative chart given below displays the performance of Nifty PSU banks in blue and Nifty private banks in orange. Over a span of 16 years, it is evident that Nifty private banks have outperformed PSU banks by a substantial margin. Since 2005, private banks have witnessed a staggering increase of nearly 2200%, while PSU banks have only managed to achieve around 340% growth in terms of returns.
This performance disparity can be attributed to various factors. Over the past decade, PSU banks have been working tirelessly to improve their Non-Performing Asset (NPA) situations, aiming for greater efficiency and consolidation. Several PSU banks have merged with larger ones, further consolidating the sector. On the other hand, the performance of private banks has become costlier in comparison to the PSU banks, without necessarily being more efficient.
While the long-term comparison may seem heavily skewed towards private banks, a closer analysis of the past four years reveals a significant shift. Since the COVID-19 market bottom, private banks have witnessed a mere 100% growth, while PSU banks have surged ahead, achieving a remarkable 340% growth during the same period. This reversal of fortune suggests that the tables are turning, and the market is finally recognizing the significant progress made by the PSU banks.
The recent surge in PSU banks’ performance can be attributed to various factors. Firstly, these banks have successfully reduced their NPA levels, which has had a positive impact on their financial health. Additionally, consolidation efforts have led to improved efficiencies and proactive measures to regain market share in the banking industry.
While private banks continue to grow, it is crucial to consider the valuations at which they are functioning. The banking industry, particularly private banks, have experienced soaring valuations. For instance, HDFC Bank, one of the leading private banks in India, recently witnessed a significant market correction despite a 35% growth in net profit due to its already inflated valuations. In comparison to international standards, private banks in India are valued at three to four times higher, mainly due to the liquidity and foreign investor interest in these stocks.
