Private sector banks in a sweet spot, stocks up 25% in 6 months

Private sector banks have outperformed the benchmark BSE Sensex by a long shot. 

While the Sensex has returned 8.5 per cent over three months, private banks have returned 18 per cent.

Over the past six months, shares of these lenders have risen 25 per cent against a 15 per cent of the Sensex.

This rise is driven by both optimism and reality. Equity strategists believe India’s private banks are in a proverbial ‘sweet spot’ as capital-starved competitors struggle with asset-quality issues. 

With public sector banks in desperate need of fresh capital, private banks are swooping in to expand their footprint both in urban and rural India. Branch additions show a tilt towards semi-urban and rural areas, so far serviced by regional rural banks. 

Thanks to better reach, private lenders are expanding their market share in the deposit and loan markets.

They continued to gain current and savings accounts (Casa) market share in FY14, too. Kotak Institutional Equities says in FY14, private banks gained 120 basis points (bps), of which gains in savings accounts were 70 bps and current account gains were 260 bps. 

Currently, private banks have a 26 per cent share in current accounts and 18 per cent share in savings deposits. The only public sector bank to defend its turf is State Bank of India. Public sector lenders’ current loan market share is 75 per cent, compared to 82 per cent in FY96. 

While public sector banks will be forced to consolidate and await fresh capital before going after fresh growth, private lenders can improve distribution through branch openings and capturing further market share.

Deutsche Bank, which expects private sector banks to improve market share, says the past five years have been the most aggressive phase for these banks in opening of branches.

The branch network for private lenders has more than doubled, says the brokerage, with a large number of branches coming up in rural or semi-urban areas. 

With growth picking up, analysts say all private banks would expand their market share by aggressively growing their loan books.

Analysts expect a 20 per cent compounded annual growth in earnings per share over FY15-20. Since banks are the growth proxy for any economy, if economic growth revives to seven-eight per cent annually over the next few years, credit growth would also touch 20 per cent-plus levels.

With supportive macro-economic conditions, the banks would easily deliver double-digit compounded returns over the next five years.