SBI vs HDFC Bank: Why public sector banks are beating private banks on the stock market

Public sector banks, once overshadowed by their private counterparts, are now regaining investor interest due to improved asset quality and profitability. Recent market trends show state-owned lenders outperforming private banks, with shares of banks like State Bank of India, Punjab National Bank, and Canara Bank seeing significant gains.
State-owned lenders are experiencing improvements in asset quality and profitability, resulting in their shares outperforming those of private banks, with many reaching multi-year highs.Over the last month, State Bank of India surged by nearly 15%, Punjab National Bank leaped by 26.82%, and Canara Bank saw a gain of 23.5%. Union Bank and Bank of Baroda witnessed increases of over 13% and 15%, respectively.
In contrast, HDFC Bank declined by 14.2%, Kotak Mahindra fell by 4.9%, Axis Bank decreased by 6%, and ICICI Bank saw a modest rise of 0.74% during this period, according to an ET report.

These share prices signify an enhanced investor perception regarding the profitability of public sector banks when compared to their private counterparts.
Niket Shah, a fund manager at Motilal Oswal AMC, noted that PSU banks are experiencing a re-rating due to exceptionally low credit costs and better asset quality, resulting in higher profit after tax (PAT) growth compared to private banks. He highlighted that the substantial increase in profits for PSU banks is primarily driven by reduced credit costs and robust asset under management (AUM) growth ranging between 12-14%.
This shift in perception towards PSU banks contrasts sharply with the sentiment prevailing a few months ago when investors were skeptical about their prospects. The significant earnings improvement in the December quarter, especially in comparison to private banks, whose results disappointed investors and led to share price declines, has bolstered confidence in the outlook for PSU banks.
The narrowing gap in share valuations between PSU and private banks indicates a changing investor preference within this sector. Previously, private banks commanded higher Price to Book (PB) ratios, ranging from 2.5-2.8 times, whereas PSU banks traded at lower PB ratios of 0.4-0.6 times. Currently, private banks are valued at 2-2.4 times PB, while PSU banks have seen an increase to 1-1.3 times on average.
Analysts anticipate further convergence in valuations, suggesting that PSU bank shares may outperform their private counterparts in the future.