General Election 2024: Private banks or public sector lenders – who will benefit more from Modi’s likely win?

In 2024, the banking sector experienced significant volatility. Year-to-date, Nifty Bank is down 0.23%, though it has rebounded in the last month, rising 1.2%.

Confidence in the election outcome and renewed inflow of foreign investors into Indian stocks pushed benchmark indices to new highs for two straight sessions. However, the banking index did not reflect this trend.

Do the elections affect the banking sector? If so, would a likely third term for Modi benefit private banks or public sector banks more?

Index trend

Due to recent market movements, shares of public sector banks have rallied while private sector banks have seen some consolidation. The Nifty Private Bank index is down over 2 per cent year-to-date (YTD), while the Nifty PSU Bank index is up over 29 per cent. In comparison, benchmark Nifty Bank gained 1.5 per cent, mainly driven by large private banks.

Year-to-date 2024, the Nifty Private Bank Index has so far delivered positive returns in 2 months and negative returns in the remaining 3 out of 5 months. It has lost about 1 percent from May to date, after rising 4 percent and 2 percent in April and March, respectively. However, it recorded losses for the first two months of the year, falling by more than 5 percent in January and 2 percent in February.

On the other hand, the Nifty PSU Bank index has given positive returns in 4 out of 5 months so far. It is down 3.4% from May to date, after six straight months of gains since November 2023. Year to date in 2024, the index is up 8.5%. in April, 1 percent in March, 10.5 percent in February and 9.8 percent in January.

Meanwhile, the trend was similar also over the last year. The Nifty PSU Bank index rose 85 percent, while the Nifty Private Bank index rose just 9 percent. In comparison, the Nifty Bank index rose above During this period, 12 percent

Ingredients

In the Nifty Private Bank index, except three stocks – ICICI Bank (13.5 per cent), Axis Bank (6.6 per cent) and Federal Bank (4.5 per cent), all remaining components have given negative returns in 2024 since inception year. Bandhan Bank was the biggest loser, down over 22 per cent, followed by IDFC First Bank, down over 12 per cent, HDFC Bank, down 11 per cent and Kotak Bank, down 10.8 per cent. IndusInd Bank, RBL Bank and City Union Bank also lost 2.9-10 per cent.

On the contrary, all components of the Nifty PSU Bank index have delivered positive returns this year. Indian Overseas Bank appreciated the most (up 55.5%), followed by Bank of Maharashtra (up 51%). All other PSU banks included in the index gained between 14 and 43 percent each.

Private or public sector banks? Which of them will benefit more from Modi’s likely victory? Here’s what the experts say:

Chris Wood of Jefferies believes that PSU banks will be the winner.

According to Chris Wood, the main reason for private bank consolidation in recent times is regulatory pressure from the Reserve Bank of India (RBI) to slow down credit growth in the retail segment, especially in the unsecured lending space, and “manage” loan-to-deposit ratios.

He added that public sector banks, which still collect 61% of deposits, have become more competitive thanks to Narendra Modi’s structural reforms such as the Insolvency and Bankruptcy Act, 2016.

Dnyanada Vaidya, Research Analyst – BFSI, Axis Securities, sees PSU banks gaining more.

We believe bank stocks are poised for strong performance and we remain positive on banks. In the fourth quarter, banks recorded results largely in line with expectations, and the most important elements were a significant increase in lending, improved deposit mobilization, a moderate rate of margin compression and good asset quality indicators. We continue to believe that banks are likely to continue to deliver similar strong performance in FY25.

After the elections, if the current government continues, we expect interest in PSU bank purchases to increase. Among PSU banks, we prefer SBI and Bank of Baroda. However, we also evaluate some private banks positively. Among private banks, we like ICICI Bank and Federal Bank.

Vinnaayak Mehta, financial and equity advisor and founder of The Infinity Group, is also more positive on PSU banks.

The government’s focus on tackling the problem of non-performing assets (NPAs) and strengthening public sector banks (PSUs) through mergers will attract more investor attention to this sector.

However, he cautioned that prudent investors must exercise caution and conduct thorough research and analysis before entering the post-election market frenzy. While optimism prevails, a sound approach based on past performance and the current financial situation of stocks is essential to navigating the potentially volatile post-election stock market landscape.

On the contrary, Jignesh Shial, Director of Research; InCred Capital’s BFSI sector head is more optimistic about private banks.

We remain positive on the sector, and specifically private banks, given their higher rates of return. There may be some volatile movements in the stock markets in the short term, which will then stabilize in the medium to long term.

Disclaimer: The views and recommendations presented above are those of individual analysts or brokerage firms, not of Mint. We advise investors to seek the opinion of certified experts before making any investment decisions.