Several PSU banking stocks have been under significant pressure in August so far, making their sectoral index underperform the Nifty 50, Bank Nifty, and the private Bank index.
The Nifty PSU Bank index is down nearly 5 per cent in August so far compared to a 1 per cent fall in the Nifty Bank and Nifty Private Bank indices each. Benchmark Nifty 50 is down about half a per cent this month.
PSB stocks, such as Indian Bank, Punjab & Sind Bank, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, SBI, Union Bank, and Punjab National Bank, have declined 5-9 per cent in August.
Experts point out that the unimpressive Q1 earnings and lack of fresh triggers have dragged PSU banking stocks.
"The PSU banking space has been under pressure for a while due to volatile earnings, the absence of operating triggers, and consistent market share loss to private players. We believe the ongoing deposit crunch will ensure that PSU banks lag behind their private counterparts. Hence, we continue to be cautious in the PSU banking space," said Jignesh Shial, the director of research and head of the BFSI sector at InCred Capital.
Public sector banks saw mild business growth and margin compression in Q1. Experts expect their net interest margin (NIM) to stabilise only in the year's second half.
"The banking sector experienced a soft quarter due to slow business growth. NIMs are expected to stabilise, and normalisation of credit costs is anticipated for public sector banks (PSB) only after the first half of the financial year (H1FY25)," said Anil Rego, Founder and Fund Manager at Right Horizons.
"Public sector banks reported a mild margin compression in Q1 as new investment guidelines led to better investment yields. Though credit growth is present, deposits are coming at a high cost. As a result, NIM (net interest margin) is compressing, which will be reflected in future results. We believe estimates have likely been trimmed for FY25 and FY26, which is why we have seen a correction," said Rego.
Another factor behind the poor show of public sector banking stocks is the heavy selling of financial stocks by foreign portfolio investors (FPIs) in August.
Anita Gandhi, the founder and head of institutional broking at Arihant Capital Markets, observed that in August, foreign investors sold financial services stocks worth ₹14,790 crore. This is the highest selling by FPls across all sectors during this period.
Gandhi pointed out that public-sector banks saw healthy gains earlier due to improved non-performing asset (NPA) levels and attractive valuations. However, this substantial increase narrowed the valuation gap between public and private-sector banks. Moreover, the Q1FY25 results of some public sector banks were disappointing. All this led to profit-taking in many of these banking stocks.
Gandhi underscored that stocks like Indian Overseas Bank and UCO Bank had stretched valuations, surpassing private-sector banks. This contributed to profit-booking in these banks.
"Considering interest rates have likely peaked, the banking sector's net interest income (NIMs) may experience limited growth going forward. Profitability growth could be driven by robust credit growth, constrained by slower deposit mobilization. From this perspective, we anticipate consolidation in public sector banks before the next upward trend," said Gandhi.
Despite the recent fall, experts do not appear upbeat about the sector. They recommend selective buying in the PSB space.
Shial of InCred Capital likes only SBI from the PSU space for its sustained momentum on loan growth and comfortable LDR, which supports margins in an aggressively competitive environment. He said SBI's stronghold in retail franchises and stable asset quality add to the comfort.
Ajit Mishra, SVP- Research, Religare Broking, said SBI and Indian Bank are showing relatively stronger performance, making them attractive options for traders looking to capitalise on this emerging strength within the PSU banking space.
"Accumulating these stocks could be a strategic move for those anticipating a rebound in the sector," said Mishra.
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