PSU bank stocks saw healthy buying interest in morning deals on Wednesday, 26 August, driving the sectoral index, the Nifty PSU Bank, up nearly 2% despite cautious market sentiment.
The Nifty PSU Bank index rose by 1.8% in the morning trade, with stocks such as Bank of Maharashtra, Bank of India, Canara Bank, Punjab National Bank (PNB), and State Bank of India (SBI) jumping between 1% and 6%.
The PSU banking stocks are not witnessing a sudden spurt. In fact, the Nifty PSU Bank index has risen by 4% this month so far, compared to a 0.60% rise in the Nifty Private Bank index and a flat, with a negative bias, Nifty 50.
Why are PSU banking stocks rising?
The rise in PSU bank stocks can largely be attributed to healthy Q1FY27 results.
Despite a challenging macro environment due to currency weakness and rising crude oil prices, the asset quality of many PSU banks surprised positively, with lower YoY slippages.
Moreover, softer bond yields hand PSU banks outsized treasury gains given their larger SLR books, and the persistent consolidation narrative keeps optionality alive across the smaller names.
To some extent, sector rotation has also contributed to the outperformance of the PSU banking stocks.
“The 4% versus 0.60% divergence this month is a rotation with real reasoning behind it, not a speculative flare,” said Harshal Dasani, Business Head at INVAsset PMS.
Dasani sees four key drivers behind the rally in PSU banking stocks.
First, Q1 delivered where it mattered, with the earnings season producing sharp moves like Indian Bank’s 10% post-results jump and broad participation across PNB, Union Bank, Canara and Bank of India, confirming this is sector-wide rather than one name’s story, said Dasani.
Second, and most importantly, the margin arithmetic currently favours PSU banks.
According to Dasani, private lenders are absorbing NIM (net interest margin) compression because their loan books reprice downward faster than deposits, which is exactly what Axis flagged in calling its 3.46% margin a cycle bottom. PSU banks, with higher CASA-driven deposit franchises and a larger share of fixed-rate and government-linked lending, are less exposed to that squeeze in the current phase, Dasani added.
The third factor is valuations. Since PSU banks still trade at meaningful discounts to book despite gross NPAs sitting at multi-decadal lows, every quarter of clean asset quality shrinks the risk premium that was justified a decade ago and is harder to justify now, Dasani explained.
Fourth, credit and deposit growth momentum has been visibly strong, with Canara’s advances up nearly 18% YoY in its early business update, setting the tone for the pack, said Dasani.
Dasani, however, cautioned that PSU bank rallies historically run hot and correct hard, so this is a trade with a valuation floor rather than a franchise-quality story.
“Within our constructive view on financials, private banks remain the core holding for compounding, while PSU banks are the tactical value expression, best owned through the margin-advantage window and trimmed when the discount to book meaningfully narrows,” said Dasani.
According to Omniscience Capital, PSU banks offer the highest alpha potential over the medium term.
“PSU banks offer the highest alpha-generation potential over the medium term. They have some of the cleanest balance sheets in decades, while delivering double-digit asset and revenue growth. Furthermore, the public sector banks are trading at significant discounts to intrinsic value,” said Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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