Private banks offer superior valuation comfort over PSU peers, says Systematix; lists top picks

livemint.com:

Also Read: Indian banks well placed with strong balance sheets, cheap valuations, says CLSAWhile operating profit growth in FY25 is expected to be superior for PSU banks compared to private banks, the brokerage sees more valuation comfort in private bank multiples versus those of PSU peers. Large-cap private banks like Kotak and HDFC Bank and mid-cap banks like IndusInd Bank are trading at valuation discounts to historical trends due to near-term idiosyncratic concerns.

As these banks work out their current limitations, their valuation multiples should improve, providing a boost to their share returns in addition to their14% CAGR in ABVPS over FY24–26E, it said. On the other hand, the brokerage pointed out that most PSU banks are averaging 1.1x forward ABVPS against forward RoAs of 1.0–1.1%, factoring in comfort on CDR, NIMs, operating expense normalisation, and continued headroom for recoveries, albeit at a slower pace.

Also Read: Private lenders take lead in employee strength ahead of PSU peersIt also notes that despite the strong share performance of SBI CYTD, the premium of SBI versus other PSU banks at 32% is significantly below its decadal average premium of 116%. Thus, the brokerage's pecking order of preference is - IndusInd Bank, HDFC Bank, SBI, Kotak Mahindra Bank, Federal Bank, ICICI Bank, and Axis Bank.

Systematix highlights that IndusInd Bank has the highest earnings growth trajectory within its coverage universe. It notes attractive valuations for HDFC Bank, coupled with expectations of improving profitability from NIM improvement and operating leverage.