In a first in 14 years, PSU banks beat private ones in loan growth
MUMBAI: For the first time since 2011, public sector banks (PSBs) have surpassed private banks (PVBs) in loan growth. At the end of FY25, PSBs outpaced PVBs by 4 percentage points, with PSBs recording a 13.1% year-on-year loan growth compared to 9% for PVBs. The strong performance was across multiple segments, including traditional areas like mortgages and corporate loans, as well as various non-mortgage retail segments such as auto loans.
"Private banks have historically commanded premium valuations due to their steady market share gains, growing 6-7% faster than the system growth rates," said Pranav Gundlapalle, India head for financials at Bernstein. "If the growth advantage continues to narrow in the medium-term, the case for premium valuations weakens. While private banks still offer above average profitability and trade at reasonable valuations, the current risk of a relative growth slowdown may not be fully priced in."
'Capable competitors'
ICICI Bank
's price-to-book (P/B) ratio is currently around 3.5. In contrast,
State Bank of India
P/B is around 1.5, reflecting differing market perceptions of the two banks' growth prospects, profitability, and risk profiles.
Private sector banks have been flagging this increased aggression from public sector banks and the resultant increase in growth and profitability pressures. "There are very large, capable competitors who are also priced meaningfully below us,"
Anindya Banerjee
, group CFO, ICICI Bank, said in its post earnings analyst call on April 19. "It does create some challenges in terms of growth, but I guess that's part of life. So, we will have to keep dealing with it as we go along and look at how we can drive other levers to continue to maintain profitable growth."
HDFC Bank
has also been flagging the same issue for several quarters.
"We have seen over last 12 months, 18 months, the larger ticket corporate loans and the larger ticket SME loans, have been competitive, particularly coming from certain public sector institutions where the growth is an objective and not necessarily margin or returns, we have seen that pricing is very, very low on those,"
Srinivasan Vaidyanathan
, chief financial officer, HDFC Bank had said in April.
Substantial Loan Base
RBI
data and Bernstein analysis showed that the difference between loan growth of PSU and PVB banks was around 4% at the start of 2011. This reached a high of 20% in 2016. The growth differential started to reduce with the onset of Covid when it fell again to 4%.
The impressive loan growth of public sector banks becomes even more remarkable when considering their substantial existing loan base. As of the end of FY25, PSBs held a total loan portfolio of ?98.2 lakh crore, representing 52.3% of the market share. In comparison, private sector banks (PVBs) had a loan base of ?75.2 lakh crore, accounting for 40% of the total loans.
While on average the top 5
PSU banks
grew their corporate loans by 10%, private banks saw less than 4% growth. The numbers were skewed because of negative growth for HDFC Bank and
IndusInd Bank
. On retail loans, while the top five PSU banks grew their book by over 22% at the end of FY25, private banks saw less than 12% growth.
Analysts suggest that PSBs also have an upper hand due to higher levels of marginal cost lending rate (MCLR) loans, as they reprice with a two-quarter lag.
"PSU banks are also relatively better placed to handle margin pressures due to the high share of MCLR, which ranges between 52-60%," Yes Securities said in a note. "Private sector banks have gained from savings account rate cuts, but they now stand largely equalized with PSU banks."
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