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Public sector banks (PSBs) in the country rely more on deposits as compared to private banks whereas private sector banks, on the other hand, actively use borrowings to manage their funding needs, according to a report by HDFC Securities.
The report highlighted that this difference in funding sources has led to a funding cost disadvantage of 20-30 basis points (bps) for PSBs in recent times. The report stated "On the liabilities side of the balance sheet, PSBs are relatively more dependent (compared to private banks) on deposits (nearly 10 percentage points higher) - on the contrary, private banks capitalize on borrowings more actively". It also added that this 10-percentage point swing accounts for a 20-30 bps funding cost disadvantage for PSBs currently. Earlier, before FY19, this gap was much wider at 50-70 bps, indicating a significant narrowing of the cost difference after recapitalization efforts. But the report also mentioned that the public sector banking (PSB) sector, once seen as structurally broken, is now showing early signs of a secular turnaround. This improvement is supported by governance reforms, balance sheet repair, recapitalization, and a more modern digital infrastructure. Additionally, there has been a gradual improvement in the quality and sustainability of earnings. This turnaround is also reflected in PSBs stabilizing their loan market share, with a 52 bps gain in FY25. They have also improved the quality of their customer franchise, enhanced service standards, and strengthened return ratios. Despite profitability improving, with return on assets (RoAs) nearing 1 per cent in FY25, investors still remain cautious about the sustainability of these gains. The report suggested that PSBs are entering a phase of structural improvement in core profitability. Select mid-tier PSBs with scalable operations, clean balance sheets, and recapitalization triggers present favourable investment opportunities. PSBs now report significantly lower gross and net slippages than private banks. Although PSBs have been more aggressive in write-offs recently, credit costs (excluding write-offs) have largely converged with those of private banks. Still, all these factors result in an 80-90 bps RoA disadvantage for PSBs. The efficiency of PSBs has improved following rationalization of branches and staff after mergers. While the number of savings accounts per branch (SA/Branch) is now better for PSBs, private banks still lead in overall branch productivity measured by deposits per branch. (ANI)
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