Private Banks May Face Growth Risks Amid Aggressive PSU Bank Push: Bernstein

The report also recalled that nine months ago, it had expected the loan growth gap between PVBs and PSBs to remerge once PSBs' excess liquidity was utilized

The faster loan growth has come at the cost of aggressive pricing, which has weighed on their net interest income (NII) growth

Source : Unsplash

Aggressive competition from Public Sector Banks (PSBs) poses a significant risk of prolonged slower growth for Private Sector Banks (PVBs), according to a report by Bernstein.

The report highlighted that PSBs grew faster than PVBs in the latest quarter, with the gap in deposit growth between the two narrowing further. This trend challenges the core of the PVB investment thesis, their ability to consistently deliver structurally higher-than-system loan growth.

It stated "there is a real risk that PVBs face a period of prolonged slower growth, while PSBs continue to grow faster, albeit with structurally lower margins".

Importantly, the report mentioned that this stronger performance by PSBs is not driven by corporate lending but by robust expansion in retail segments. PSBs have reported stellar growth in home loans, MSME loans, and their overall retail portfolios.

However, the report cautioned that this aggressive growth strategy is not necessarily been favourable for PSBs themselves.

The faster loan growth has come at the cost of aggressive pricing, which has weighed on their net interest income (NII) growth.

Despite higher loan growth and an improving loan-to-deposit ratio (LDR), PSBs' NII growth has still trailed that of PVBs. Their return ratios (RoAs) remain supported more by benign credit costs and healthy treasury gains rather than core operating performance.

The report also recalled that nine months ago, it had expected the loan growth gap between PVBs and PSBs to remerge once PSBs' excess liquidity was utilized. That liquidity has now been fully absorbed, yet the aggressive stance from PSBs has intensified instead of fading.

The report's base case now is that PSBs will eventually scale back their aggression as the current tailwinds to RoA benign credit costs and treasury gains begin to fade.

If this does not happen, PVBs could face an extended phase of slower growth, while PSBs may continue to expand at a faster pace but with structurally lower margins.

It stated "Our base case now is that PSBs will eventually dial back their aggression"

The report concluded that this heightened competitive environment is a key development that investors will need to watch closely.

(This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)