Why InCred believes private banks will outperform PSU Banks in the current rate cycle

InCred has reiterated its preference for private sector banks over public sector undertakings (PSU banks), citing structural strengths, better margin management, and more attractive risk-reward dynamics in a declining interest rate cycle. The brokerage’s stance is grounded in a combination of profitability resilience, strategic positioning, and valuation considerations—particularly when assessed through the lens of the Price-to-Earnings Growth (PEG) ratio.

Margin Resilience in a Repo Rate Downcycle

One of the primary reasons InCred favours private banks is their superior ability to protect net interest margins (NIMs) in a falling interest rate environment. Private lenders, InCred says, enjoy a relatively stronger starting point in terms of margins and possess the operational flexibility to reprice liabilities faster and shift their loan mix towards higher-yielding segments like unsecured retail loans. Additionally, they have already begun passing on repo rate cuts to their customers while maintaining pricing power through differentiated products and stronger customer franchises.

PSU banks, on the other hand, are expected to face more severe pressure on their margins due to their slower deposit repricing mechanisms, limited flexibility in savings rate cuts, and relatively higher exposure to fixed-rate assets. This structural lag, InCred believes, will impair their core profitability more sharply than private banks.

PEG Favourable for Mid-Sized and Select Large Private Banks

InCred’s analysis also considers valuation metrics such as the PEG ratio, which compares a stock’s Price-to-Earnings (P/E) multiple with its expected earnings growth rate. A PEG ratio below 1 typically signals undervaluation relative to growth. According to InCred, select mid-sized private banks—such as RBL Bank and AU Small Finance Bank—trade at significantly more attractive PEG ratios compared to most PSU banks.

For example, AU Small Finance Bank, with an estimated earnings CAGR of 25 percent over FY25–27 and a current valuation of 2.2x FY27F book value, offers a PEG ratio that supports its classification as a compounder with sustained growth potential. Similarly, RBL Bank, trading at 0.7x FY27F book value, offers upside potential with legacy asset quality concerns now behind it. These banks offer a compelling risk-reward profile when PEG is taken into account.

In contrast, many PSU banks are trading at relatively low P/E multiples, but their expected earnings growth trajectory is not strong enough to warrant re-rating. Despite appearing cheap on a standalone P/E basis, InCred believes their PEG ratios are less attractive because the margin and credit growth challenges will likely persist over the next few quarters.

Valuation-Driven Ratings

InCred has assigned ‘ADD’ ratings to Axis Bank, HDFC Bank, and ICICI Bank, with the view that these banks are better equipped to navigate the repo rate downcycle. HDFC Bank, in particular, is seen outperforming ICICI Bank in the medium term due to robust earnings visibility and healthy deposit growth. These banks may not appear undervalued in absolute terms, but their PEG ratios remain within a comfortable range given the quality of earnings and return ratios.

Among PSU banks, Punjab National Bank (PNB) and Canara Bank are the only ones with an ‘ADD’ rating from InCred, driven primarily by their reasonable valuations and ample liquidity. However, State Bank of India (SBI) and Bank of Baroda (BoB) have been assigned ‘HOLD’ ratings due to their current valuations already reflecting most of the upside, despite being among the better-managed PSU banks.

Overall, InCred’s preference for private banks over PSU banks is rooted in their ability to better manage margins, deliver consistent earnings growth, and maintain asset quality, particularly in an environment of falling interest rates. When filtered through the PEG ratio lens, mid-sized and large private banks continue to offer more favourable valuations relative to their growth prospects. This positions them as superior investment opportunities compared to PSU peers, whose structural and cyclical limitations may cap near-term re-rating potential.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.