Bernstein Picks Private Banks Over PSUs, NBFCs On Cheaper Valuations

Private sector banks are better placed than public sector banks as they have similar return on equities but with relatively cheaper valuations, upgraded cycle and a return of investor interest, Bernstein Research said in a note.

The brokerage firm expects widening of the loan growth gap between private banks and state-owned banks as the latter have exhausted their excess liquidity. Their loan growth will now be constrained by their deposit growth, which remains significantly weaker than private players, it said.

However, state-owned banks are better placed on the profitability front from a rate cut perspective.

This has come as since May 2024, private sector banks have outperformed state-owned banks by 15% and since August 2024, private specialty finance have outperformed public sector banks by 24%.

Within non-banking financial companies, the global research firm said, that the signals are mixed as the relative valuation case is strong for private players trading at 143% premium as against 200% average premium forward price to earnings.

However, public specialty financiers have better return on equities at 19.3% as compared to 12.4% of private players on the back of renewed earnings upgrades. Private players are still witnessing a downgrade cycle and low crowding effect.

Despite the sharp growth seen in private NBFCs in the last 10 years, private sector banks are better placed because of attractive relative valuations, record low levels of 12-month forward price earnings, Bernstein said.

While PSU NBFCs are a big proxy of the value and dividend yield trade, PSU banks are equally a play on low value and laggard. On the private side, both banks and NBFCs mean taking high value exposure while private sector banks also have low value and laggard element.

Since Bernstein prefers low value stocks and recommends avoiding high value names, it believes that banks are a better play than NBFCs.

Likely rate cuts normally position NBFCs over banks but given that the rate cut cycle is expected to be shallow, asset quality pain could linger for longer, leading Bernstein to choose banks over NBFCs.