Modi’s Likely 2024 Win: Impact on Private Banks vs. PSBs and Their Market Performance

<ul>
    <li>The banking sector has experienced significant volatility in 2024.</li>
    <li>Year-to-date, the Nifty Bank is down 0.23 percent, though it has rebounded in the last one month, rising 1.2 percent.</li>
    <li>Certainty in the election outcome and renewed foreign investor inflows into Indian equities have pushed benchmark indices to new peaks for two consecutive sessions. However, the banking index has not mirrored this trend.</li>
</ul>
<p><strong>Explore the current trends and future outlook of the banking sector amidst election outcomes and market movements.</strong></p>
<h2><strong>Index Trend</strong></h2>
<p>Amid recent market movements, public sector bank stocks have surged while private sector banks witnessed some consolidation. The Nifty Private Bank index has declined over 2 percent year-to-date (YTD), whereas the Nifty PSU Bank index has surged more than 29 percent. In comparison, the benchmark Nifty Bank has gained 1.5 percent, mainly driven by heavyweight private banks.</p>
<h3><strong>Private vs. Public Sector Banks</strong></h3>
<p>In 2024 YTD, the Nifty Private Bank index has given positive returns in 2 and negative in the remaining 3 of the 5 months so far. It has lost around 1 percent in May till date after a 4 percent and 2 percent rise, respectively, in April and March. However, it was in the red in the first 2 months of the year, down over 5 percent in January and 2 percent in February.</p>
<p>On the other hand, the Nifty PSU Bank index gave positive returns in 4 of the 5 months so far. It shed 3.4 percent in May till date after 6 straight months of gains since November 2023. In 2024 YTD, the index rose 8.5 percent in April, 1 percent in March, 10.5 percent in February and 9.8 percent in January.</p>
<h3><strong>Constituents</strong></h3>
<p>In the Nifty Private Bank index, barring 3 stocks - ICICI Bank (13.5 percent), Axis Bank (6.6 percent), and Federal Bank (4.5 percent), all other constituents have given negative returns in 2024 YTD. Bandhan Bank shed the most, down over 22 percent, followed by IDFC First Bank, down over 12 percent, HDFC Bank, down 11 percent and Kotak Bank, down 10.8 percent. IndusInd Bank, RBL Bank and City Union Bank also lost 2.9-10 percent.</p>
<p>On the contrary, all constituents of the Nifty PSU Bank index have delivered positive returns this year so far. Indian Overseas Bank is the top gainer, up 55.5 percent, followed by Bank of Maharashtra, up 51 percent. All other PSU banks in the index have advanced between 14 and 43 percent each.</p>
<h3><strong>Private or Public Sector Banks? Which Will Benefit More from the Likely Modi Win? Here's What Experts Say:</strong></h3>
<h3><strong>Chris Wood of Jefferies Believes PSU Banks Will Be the Winner</strong></h3>
<p>The key reason behind the consolidation in private banks recently, according to Chris Wood, is the regulatory pressure from the Reserve Bank of India (RBI) to slow loan growth in the retail segment, particularly in the area of unsecured loans, and to “manage" loan-to-deposit ratios.</p>
<p>He added that public sector banks, which still account for 61% of deposits, have become more competitive helped by Narendra Modi’s structural reforms such as the Insolvency and Bankruptcy Act of 2016.</p>
<h3><strong>Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities, Sees PSU Banks Gaining More</strong></h3>
<p>We believe banking stocks are poised to deliver a strong performance and we remain positive on banks. In Q4, banks reported largely in-line results, with highlights being healthy credit growth, improved deposit mobilisation, a moderating pace of margin compression, and strong asset quality metrics. We continue to believe that banks are likely to continue to deliver similar healthy performances in FY25.</p>
<h3><strong>Vinnaayak Mehta, Financial & Stock Advisor and Founder, The Infinity Group, Is Also More Positive on PSU Banks</strong></h3>
<p>The government's focus on addressing non-performing assets (NPAs) and strengthening public sector banks (PSUs) through mergers will attract more investor attention to this sector.</p>
<p>However, he cautioned that prudent investors must exercise caution and conduct thorough research and analysis before entering the post-election market frenzy. While optimism prevails, a judicious approach informed by past performance and current financial standings of stocks is essential for navigating the potentially volatile post-election landscape of the stock market.</p>
<h3><strong>On the Contrary, Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital, Is More Bullish on Private Banks</strong></h3>
<p>We remain positive on the sector and more specifically on private banks given their higher return ratios. Stocks may see some unstable movements in the near term only to stabilise in the medium to long term.</p>
<h3><strong>Conclusion</strong></h3>
<p>The banking sector's performance in 2024 has been mixed, with public sector banks outperforming their private counterparts. The upcoming election results are likely to further influence this trend, with experts favoring PSU banks due to regulatory and structural reforms. Investors should remain cautious and well-informed to navigate the post-election market dynamics effectively.</p>