Why are investors dumping PSU banks in favour of private sector banks?

Updated: Saturday, July 28, 2012, 9:47 [IST]

Investors are dumping PSU banks in favour of private sector

On Friday, private sector bank HDFC Bank, surpassed PSU banking major, State Bank of India as the most valued bank. There was a fresh buying in HDFC Bank shares which saw the market capitalisation of the bank swell to Rs 1,37,500 crore and the stock gained more than 3%.

On the same day, shares of other major private sector bank ICICI Bank too rose sharply gaining 2.25%. Following these private banking majors were other privately owned banks, amongst which were Yes Bank, Karnataka Bank, Federal Bank etc.

When private sector banks shares rose, PSU banks were hammered out of shape. Union Bank of India declined 7.86%, State Bank of India fell 3.77%, Punjab National Bank lost 5.34%, Canara Bank was down 3.64% and Bank of Baroda shed 2.46%.

Clearly, as far as PSU banks are concerned the market is worried about non performing assets (NPAs). Punjab National Bank which reported Q1 2013 numbers on Friday saw gross NPAs going up from from two per cent in the year-ago period to 3.34 per cent as of June 30.

Union Bank of India which also reported numbers on the same day saw its gross NPAs at 3.76% of gross advances as on 30 June 2012, higher than 3.01% as on 31 March 2012 and 2.57% as on 30 June 2011.

Markets fear that State Bank of India and other bigger PSU banks might continue to see pressure on asset quality, which is why there was severe drubbing in the stocks of PSU banks. Analysts opine that as the economy continues to witness a slowdown there is a possibility that NPA levels could reach alarming proportions.

Private sector banks have managed to control their NPAs very well which is why their shares have been rising. HDFC Bank saw asset quality remain healthy and stable with gross non-performing assets as on June 30, 2012, at 1.0% of gross advances. ICICI Bank on the other hand saw gross NPA fall to 3.54% from 3.62% QoQ.

Clearly, PSU banks and private sector banks shares are moving in different directions based on their asset quality. If PSU banks improve their asset quality we could see sharp rise in their share prices as well.

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