Public sector banks are benefiting from lower credit costs and increase in risk appetite due to asset quality clean-up, but they face the risk of yielding further ground to private lenders on deposit mobilization – across geographies and customer segments. Hence, capital costs at public lenders could climb. Analysts also expect PSU banks to lose out on the higher-yielding consumer loan segments as private banks deploy more technology and manpower to grab the pie.
“Public sector banks have seen a sharp re-rating as the asset quality environment improved, they were helped by better liquidity and falling credit costs; however, we think the asset quality cycle basis re-rating is largely done in the sector and the focus will now shift back to the ability of individual banks to grow faster than system and deliver better or higher ROEs,” said Pranav Gundlapalle, head, India financials, Bernstein.
