- Private banks show stronger operating stability and earnings visibility than PSU banks in Q4
- Private banks faced margin pressure but managed loan growth better than PSU banks in Q4
- PSU banks deal with higher costs and mixed earnings, with modest FY27 margin guidance
After a prolonged phase where public sector banks dominated market returns, analysts seem to be increasingly shifting back toward private lenders, betting that stronger operating stability and better earnings visibility could help them outperform over the next phase of the banking cycle. This has become visible both in earnings trends and valuation expectations.
Aditya Shah, founder of Hercules Advisors, said that he would be keen on bothe sets of banks, but his preference, "would lie towards something like an HDFC Bank which is trading at about five to 10-year low valuation." He added that heavy FII ownership had weighed on private bank stock performance over the last two to three years. “Except ICICI Bank, none of the other banks have really given return,” he noted.
Q4 Earnings Performance
When it comes to the March quarter, Private banks delivered relatively steady results, with healthy core operating performance, stable asset quality and consistent loan growth trends. While margin pressure and weaker treasury income remained common pain points across the sector, analysts believe large private lenders managed the slowdown better than their PSU counterparts.
By contrast, public sector banks reported a more mixed-to-weak Q4, with sharper pressure on net interest margins, softer treasury performance and rising operating costs weighing on profitability.
Challenges Ahead
Despite the relatively stable quarter, most lenders issued cautious FY27 guidance on margins, citing moderation in deposit growth and continued pressure on funding costs. Weak treasury income also remained a common drag across the sector. Another key issue remains valuation expectations versus growth delivery. Private banks are still expected to maintain stronger profitability metrics, which means any slowdown in loan growth or compression in margins could lead to disappointment.
For PSU lenders, the concerns are more structural, like higher operating expenses and elevated cost-to-income ratios as major pressure points for FY27. Several public sector banks also guided for relatively modest return on assets and margin performance in the coming year. While PSU banks benefited significantly from improving asset quality and treasury gains over the last cycle, sustaining that momentum may become harder as liquidity tightens and earnings normalise.
Valuations
Private lenders continue to trade at premium valuations compared to PSU peers, reflecting stronger return ratios and more predictable earnings profiles. ICICI Bank currently trades at around 2.18x one-year forward price-to-book value, while HDFC Bank trades near 1.87x. Axis Bank and Kotak Mahindra Bank trade at roughly 1.65x and 1.91x, respectively.
PSU banks, on the other hand,continue to trade at significantly cheaper valuations, with many lenders still below 1x one-year forward book value. State Bank of India trades at around 1.44x forward book, while Bank of Baroda and Union Bank of India remain below 1x.
Analyst Targets
Despite the valuation premium, analysts still see meaningful upside potential. Consensus estimates imply around 33% upside for HDFC Bank and nearly 30% for ICICI Bank. Brokerages argue that after years of underperformance, private banks now offer an attractive balance of valuation comfort, earnings stability and long-term compounding potential.
In comparison, most PSU lenders have relatively lower implied upside despite cheaper valuations. State Bank of India has an estimated upside of around 23%, while Bank of Baroda and Punjab National Bank are seen offering upside closer to the low-to-mid teens.
Shah warned that if aggressive lending continues while rates rise, non-performing assets could become a concern across the sector. However, he added that larger lenders with stronger underwriting standards remain better placed. “A bank which would lend at about 8% like HDFC Bank, SBI or ICICI Bank would be in a far better position than a bank lending at 14-15%,” he said.
Shah also said State Bank of India remains his preferred PSU banking play because of its growth visibility and stronger positioning relative to peers. “From a growth perspective SBI will continue to do extremely well,” he said, while cautioning that the broader PSU banking basket may face greater pressure if asset quality weakens in FY27.
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