Public Sector Banks Eye Redevelopment Amid Funding Challenges
A report from HDFC Securities reveals that public sector banks in India face a funding cost disadvantage due to their reliance on deposits, unlike private banks that utilize borrowings. Despite the challenge, PSBs are showing signs of revitalization through reforms, improved balance sheets, and investment opportunities in mid-tier banks.
- Country:
- India
Public sector banks (PSBs) in India are increasingly reliant on deposits, unlike their private counterparts who make strategic use of borrowings for their funding needs, according to an HDFC Securities report. This dependence on deposits has led to a funding cost disadvantage of 20-30 basis points for PSBs in recent times.
The report outlines that, on the liabilities side of their balance sheets, PSBs have a higher reliance on deposits, nearly 10 percentage points more than private banks. This allocation leads to a current funding cost disadvantage of 20-30 basis points for PSBs, down from a wider gap of 50-70 basis points before FY19, thanks to recapitalization efforts.
Interestingly, the report indicates a positive shift in the PSB sector, once viewed as structurally flawed, now showing signs of a turnaround thanks to governance reforms, strengthened balance sheets, recapitalization, and digital advancements. There's also marked improvement in earnings quality and sustainability.
This resurgence is evident in PSBs regaining loan market share with a 52 basis point gain anticipated in FY25. They are enhancing their customer franchises and service standards and have improved return ratios. Despite these gains and a nearing 1 percent return on assets by FY25, investor caution remains regarding the stability of these improvements.
The report forecasts a structural improvement in PSBs' core profitability. Mid-tier PSBs with scalable operations and clean balance sheets present lucrative investment avenues. Compared to private banks, PSBs now report significantly lower gross and net slippages, though have been more proactive in recent write-offs, with credit costs largely converging.
However, an 80-90 basis point return on asset disparity still exists for PSBs. Post-merger rationalization has enhanced PSB efficiency, with better savings account numbers per branch. However, private banks still lead in productivity, assessed by deposits per branch. (ANI)
(With inputs from agencies.)
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