Historically, private Banks (10-year average Price to Book multiple of 2.4x) have always traded at a premium to PSBs (multiple of 0.9x) due to their superior earnings profile, return ratios and consistent market share gains.
Private Banks are trading at 2.4x 1-year forward P/B (after touching high of 3.1x), largely due to concerns around fresh defaults.
Earnings trajectory of private bank should going forward as a large part of their asset quality challenges and provisioning pressure has been done away with.
Furthermore, the recent tax rate cut should provide further fillip to their FY21E ROEs in the range of 110-210bp.
Multiples at corporate banks (ICICIB, AXSB) have been quite divergent across asset cycles, reflecting the earnings sensitivity of corporate banks to NPLs and provisioning.
While the P/B multiples of ICICIB and AXSB have been suppressed (Long term average of 2x for Axis Bank and 1.7x for ICICI Bank), the multiples should re-rate as these banks are moving towards higher retail loans and higher share of retail liabilities, which would enable them to have stable earnings profile due to improved margins and lower credit cost.
Disclaimer: The above report is compiled from information available on public platforms. inChat team advises users to check with certified experts before taking any investment decisions.
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