With private banks deemed too expensive and state-owned lenders struggling with bad loans, investors are turning to an alternative set of entities with more encouraging prospects - non-banking finance companies.
The total market capitalisation of 15 public sector banks is now about Rs 2.71 lakh crore, which is just over half the Rs 4.78 lakh crore worth of the NBFC universe that includes Bajaj Finance, Indiabulls Housing Finance, Shriram Transport Finance and Mahindra Finance, according to data from ETIG.
"Top non-banking finance companies have found huge flavour from investors as the charm of private sector banks has gone out with expensive valuations," said Sanjiv Bhasin, executive vice president, markets and corporate affairs, at IIFL.
"With efficient management, top NBFCs look promising with retail and rural growth prospects."
In the past year, state-owned banks have lost 30% of their combined value compared with a 4.6% gain by NBFCs including Housing Development Finance Corp.
The shares of private lenders including Kotak Mahindra Bank, Yes Bank, Axis Bank and HDFC Bank are now available at about 2.7-six times their book value, according to data from moneycontrol.com. ICICI Bank, the largest private bank, is 1.7 times higher, but with sizable sunk loans that trigger investor worries.
"Private sector banks are richly valued, making it a less attractive investment proposition while public sector banks credit growth prospects are weak," said Sandeep Nayak, CEO of Centrum Broking. "Bad loan recognition is being done by public sector banks, but its resolution will take time."
"With this, NBFCs growing their loan books steadily have turned out to be the darling for investors," he said. The shares of state-owned lenders, except State Bank of India, the country's largest, are now more affordable, with a price-to-book value ratio (a gauge for valuation) below 1.
"NBFCs with retail focus are preferred over corporate lenders. With better risk management and collection efficiency, they have delivered profitable growth," said Navneet Munot, chief investment officer of SBI Mutual Fund.
Among public sector lenders, State Bank of India, Punjab National Bank, Bank of India and Canara Bank are among those that lost 39-49% of their market cap in the past one year. In the finance space, Bajaj Finance's market cap ballooned 82% with Indiabulls, Shriramand Cholamandalam Investment increasing between 43% and 63%.
With relatively lower loan ticket sizes, NBFCs have fewer bad loans. They also recover loans faster with help of their grassroots connect with customers.
Mahindra Finance reported an 18% quarter-on-quarter decline in gross non-performing assets, which reduced the gross NPA ratio by 210 basis points to 8%.