PSU Banks vs Private Banks. Who's Likely to Win as Capex Gets a Boost?

The past few years have witnessed subdued capital spending in the country. This was on account of a slowdown in demand and the pandemic. However, this seems to be changing now.

The government is employing capital expenditure programs to revive demand and stimulate growth in the economy. This is as opposed to sector-specific fiscal measures i.e. capital spending.

In the Union Budget for this year, Finance Minister Nirmala Sitharaman announced a capital expenditure target of Rs 7.5 tn for financial year 2023, up from Rs 5.6 tn announced in financial year 2022.

The private sector too is expanding its capacities to support the anticipated growth in demand and benefit from it. According to Goldman Sachs, private sector manufacturers in India raised their fresh investment announcements in FY22 by more than three-fold over the last year to Rs 8 tn.

So who stands to benefit from this rise in capex? Private Banks of PSU Banks?

When it comes to government spending, public sector banks (PSUs) are obliged to lend to them. Therefore, they do most of the capex-led loan disbursements. After all, these are government held banks that are lending money to the government for its capital spending.

So, keeping this in mind, we name some of the well-poised lenders in the industry that stand a chance to win from the boost in capex.

#1 State Bank of India (SBI)

First on our list is the country's largest banking institution, State Bank of India (SBI).

The financial giant has been actively funding capex for infrastructure projects and should benefit the most as the capex boom pans out. The infrastructure segment accounts for nearly 15% of the loans disbursed by the company.

While the bank has had a checkered past, it has turned its financials around.

The bank has multiplied its profit by 15 times in the last year, reporting a 3-year CAGR of 149%. The asset quality, as depicted by the net non-performing assets (NPA) stands at 0.8%.

While it has improved dramatically, falling from 5.7% in the financial year ending 2018, it is still below HDFC bank's which has never crossed 0.5%. The Capital Adequacy Ratio (CAR) for SBI stands at 13.9%, well above the regulatory requirement of 12%.

All of this has trickled down to strong return numbers. The return on equity has soared from -2.6% in the financial year ending 2018 to 11.6% in the financial year ending 2022.

The stock price reflects the financial giant's stellar performance. It has been one of the top performers in the past five years. It generated a return of 76.3%, leaving private sector big-wigs HDFC bank (65.5%) and Axis Bank (59.8%) behind.

Moreover, the bank is confident of generating sufficient capital organically to fund the growing business.

To know more about the bank, check out its financial factsheet and latest financial results.

#2 Bank of Baroda

Next on our list is the Bank of Baroda (BOB).

The PSU lender has a loan book exposure of 15.3% to the infrastructure sector and is well-poised to grow briskly in the aftermath of the capex-driven credit boom.

Over the years, the bank has leveraged its corporate relationships to enhance its loan book. It has achieved this while building a credible international presence.

Currently, 10% of the total deposits held by the bank hail from its international operations.

The profits growth has been robust, registering a 3-year CAGR of 92.1%. The Net NPAs have also fallen by one-third at 1.7% over the same period, indicating a healthier asset quality. All of this has culminated in higher return ratios.

The return on equity is up four times over the last four years at 8.5% in the financial year ending 2022.

The CAR has also been increasing steadily. It is at a desirable level of 15.8% in the financial year ending 2022, well over the regulatory norms. This outstanding performance, especially during the pandemic sets it apart from the other PSU peers.

The share price mirrors the lip-smacking performance and a well-capitalised balance sheet. In the past three years, BOB has, perhaps, been the best-performing banking stock, beating the public and the private sector giants.

Barring the pandemic effect, the stock price is up 3.5x, from Rs 41 in October 2020 to Rs 149 in October 2022.

To know more about the bank, check out its financial factsheet and latest financial results.

#3 Punjab National Bank (PNB)

Third on our list is Punjab National Bank.

The bank has a 13% loan book exposure to the infrastructure sector, and is set to benefit from the capex boost.

PNB became the second largest PSU lender in March 2020. This was after United Bank of India and Oriental Bank of Commerce were merged into it.

Over the years, PNB has lost market share to private banks as they have ramped up their corporate business and leveraged their strong deposit franchises to offer lower rates.

However, the bank business has been recovering. It has turned the losses into profits in the past four years. The net NPAs have halved, falling from 11.2% in the financial year ending 2018 to 4.8% in the financial year ending 2022.

While the asset quality has improved, it is a far cry from that of major lenders like SBI (0.8%) and HDFC Bank (0.5%).

The return ratios have improved sharply, up from 0.7% in the financial year ending 2020 to 4% in 2022.

The CAR has been steadily increasing, up from 9.2% in the financial year ending 2018 to 14.5% in 2022. It is well above the regulatory norm of 12%.

The performance advances put the lender on the fast track to hoovering up all the benefits from robust capital spending.

The stock price took a hit once the lender started losing market share. It has underperformed its peers sharply, falling by over 81% in the last five years. However, the stock price has been stable in the past two years rising from Rs 28 in October 2020 to Rs 39 in October 2022.

To know more about the bank, check out its financial factsheet and latest financial results.

In conclusion,

The government is employing capital expenditure programs to boost demand. The key is to stimulate growth via a long-term capex measure.

There is a clear thrust towards reviving capital spending in infrastructure that bodes well for companies in the public and private sectors.

If the government manages to walk the talk, it will culminate in consistent economic growth over the next few years.

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