According to analysts, the rally in most PSB stocks in 2024 was driven by the continuation of the government at the Centre.
The year 2024 was a roller-coaster ride for Indian stock markets, marked by volatility driven by the Lok Sabha elections, Union Budget 2024, a slowdown in corporate earnings, and sticky inflation.
Geopolitical tensions — particularly between Israel and Iran in West Asia — along with various stimulus announcements by China and yen carry trade rocked the equity markets throughout the year.
Yet public sector banks (PSBs) enjoyed a smoother ride.
According to ACE Equity data, the National Stock Exchange (NSE) Nifty PSU Bank Index surged 24.08 per cent on the NSE in 2024 (until December 11).
In comparison, the Nifty 50 index delivered a return of 13.39 per cent, while the Nifty Bank index gained 10.56 per cent during the same period.
The Nifty Private Bank index, on the other hand, advanced just 3.94 per cent in the current calendar year.
What drove the rally?
According to analysts, the rally in most PSB stocks in 2024 was driven by the continuation of the government at the Centre after the general election outcome in June, which benefited public sector undertakings broadly, including PSBs.
Investor sentiment was further buoyed up by sustained improvements in PSBs’ financials, reduced interference from union bodies, improved checks and balances in credit disbursement, better-than-expected margin and asset quality performance, and favourable risk/reward compared to private banks.
“PSBs have been outperforming private banks since 2023 due to improved balance sheets supported by higher recoveries and write-offs of bad loans, as well as higher non-food credit growth amid better economic conditions in India.
“Moreover, decade-low valuations also made PSBs attractive during this period,” said Gaurav Dua, senior vice-president and head of capital market strategy at Mirae Asset Sharekhan.
During the July-September quarter of the current financial year (2024-25), private banks tracked by the brokerage reported modest earnings growth of 8 per cent year-on-year (Y-o-Y) due to weak net interest income (NII) growth and normalised credit costs.
In contrast, PSBs reported healthy earnings growth of 39 per cent Y-o-Y, driven by higher Treasury gains, recoveries from written-off accounts, and lower credit costs, which offset weak NII growth.
Most PSBs, the data shows, reported relatively lower credit-deposit ratios and are better positioned on the liquidity front.
Will the ride last?
Looking ahead, analysts believe that PSBs’ outperformance over private banks may continue for a few more months before tapering off.
“The catch-up rally in PSBs has some more momentum and is expected to continue into the early months of 2025.
“Beyond that, however, it will become a stock-pickers’ market, and investors will need to evaluate the overall banking sector based on earnings,” said Deepak Jasani, head of retail research at HDFC Securities.
Among individual stocks, Indian Bank has jumped 38.5 per cent on the NSE so far in 2024.
State Bank of India (SBI) and Indian Overseas Bank are other PSB stocks that have gained over 30 per cent during this period, data shows.
That said, Dua of Mirae Asset Sharekhan believes 2025 may not witness an “all-round” rally in PSB stocks.
“Investors will need to be selective. We favour SBI, Bank of Baroda, and Bank of India within this space,” he added.
Jasani of HDFC Securities also noted that the valuation gap between PSBs and private banks is narrowing, limiting the scope for further outperformance.
He advised investors holding PSBs to maintain their positions for a quarter or two before reassessing based on earnings.
“Private bank stocks, on the other hand, may soon see their period of underperformance end, with most poised to catch up with their peers and the broader Nifty,” Jasani added.
