Nifty PSU Bank index fall 3% as SBI, Canara Bank among biggest losers

Morgan Stanley suggested investors shift to large private banks over state-owned banks.

Shares of public-sector banks remained under pressure as the Nifty PSU Bank index declined almost three percent in trade on September 6. The index was the worst-performing sector, extending its total fall to around 4 percent over the past month.

SBI, Canara Bank, Indian Bank, and Indian Overseas Bank were some of the worst hit lenders, falling up to 4.5 percent on the NSE.  Given the index's 2.8 percent fall so far, over Rs 40,000 crore in value has been erased in trade today.

September seasonality could be a factor at play, as Nifty PSU Bank has given investors negative returns eight out of 13 years in September.

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In a recent note, Morgan Stanley issued a series of updates on Indian banks, suggesting investors to shift to large private banks over state-owned banks. The brokerage emphasised it was 'time to get selective', as the strength of banks' franchises will drive divergence in profitability.

For public sector banks, analysts at Morgan Stanley have taken a cautious stance as State Bank of India (SBI) and Bank of Baroda have been maintained at 'Equal-Weight,' with their target prices reduced to Rs 800 per share and Rs 265 per share, respectively.

Morgan Stanley believes large private sector banks are better positioned to navigate the current cycle and are likely to see higher relative valuations. They highlight a significant trade-off between growth and profitability at state-owned banks.

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