Turnaround in sight at private banks, now is the time to bet
Nifty Private Bank ETF. A sharp improvement in return ratios, expected economic growth, reasonable valuations, and recent underperformance compared to the PSU banks make this a good bet for investors with a high appetite for risk, wealth managers said.
The Nifty Private Bank Index has underperformed the Nifty 50 and PSU Bank indices over the last one year.
It returned 11.08% compared to the Nifty 50's 12.7% and PSU Bank ETF return of 64.21%. Over a three-year period, the Private Bank ETF returned 26.11%, higher than the Nifty's 22.20%, but lower than the PSU Bank ETF's 59.05%.
Due to this underperformance, the valuations of private sector banks have come off.
Data from DSP Mutual Fund show private banks trade at a price-to-book (P/B) of 2.8 compared to its historical average of 3.2 over the last 17 years. On the profitability front, they have seen a sharp rise in return ratios in the last four years.
The return on equity (ROE) and return on assets (ROA), key metrics used by analysts to track returns for private sector banks, stood at 9.5% and 1% in FY19 and increased to 15.4% and 1.8% in FY23.
«Private banks are trading below their historic averages and are significantly lower than the broader Nifty 50. Historically, Nifty Private Bank has outperformed Nifty 50 on a three-year rolling return basis,» said Anil Ghelani, head of passive investments at DSP Mutual Fund.
Ghelani believes there is a strong case for investing in the private bank ETF with a three-year time frame.
The Nifty Private Bank ETF has a concentrated portfolio of 10 banks with HDFC Bank, ICICI Bank, Axis Bank, Indusind Bank and Kotak Bank constituting about 80% of the portfolio. The other five stocks — Federal Bank, IDFC First Bank, Bandhan Bank, RBL Bank
