Why PSU bank stocks fell while private sector banks rose today?

Two Bank Nifty heavyweights - ICICI Bank and HDFC Bank - are not present in the PSU bank index.

While Bank Nifty staged a smart recovery from yesterday’s losses to gain almost one percent intraday, PSU bank stocks fell.

Analysts suggest that the divergence in performance might be a result of profit-taking in PSU bank shares following the run-up over the past few months, which private sector banks did not see. PSU banks were undervalued compared to private banks prior to the rally but the recent FII selling has turned valuations of large-cap private sector banks attractive as well.

Also Read: Industries, Defence and Railways to offer multi-year investment potential: Antique Broking

The Nifty PSU Bank index slipped over one percent intraday before closing lower by 0.51 percent. On the other hand, Bank Nifty settled higher by 0.57 percent at 44,213.35.

Why the divergence?

Banking stocks have seen ample traction of late with an increased focus on public sector banks, said Shreyansh Shah, a research analyst at Stoxbox.

There was no run-up in the recent rally in private sector banks as funds were diverted to PSBs, which were primarily undervalued compared to the private banks.

Additionally, banks have cleaned up their balance sheets and improved asset quality, especially the low slippage ratios and credit costs in public sector banks.

“At the current juncture, we see public sector banks under pressure due to profit booking after a rally in the last few months,” added Shah.

Vikas Jain, senior research analyst at Reliance Securities, said that ahead of the RBI policy announcement, volatility in banking stocks usually sees an increase.

Index weightage differs

A key reason for the divergence between Bank Nifty and the Nifty PSU Bank Index is driven by the way both indices are constructed. 52 percent of Bank Nifty's weightage comes from HDFC Bank and ICICI Bank combined, both of which have been sliding since mid-September, said Anand James, chief market strategist at Geojit Financial Services.

Also Read: RBI expected to retain benchmark rate: Experts

These two index heavy-weights are not present in the PSU bank index, of which, the largest constituent is SBI, with a 31 percent weightage. Canara Bank and PNB contribute around 11 percent each and Bank of Baroda weighs around 18 percent. "And all of these stocks, except for SBI, have been on an exceptionally steep uptrend, for a sustained period. This, in turn, kept the PSU bank index near overbought levels consistently, and a negative divergence that emerged last week, finally signalled a move lower," added James.

FII selling drags banks

As a result of the rising dollar, US bond yields and crude, FIIs have begun selling off in local markets. “A significant trend in the market is that fundamentally strong stocks like large-cap private sector banks have turned weak on FII selling,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services. However, this has turned valuations on these banks attractive, offering long-term investors an opportunity to enter the share.

The sell-off has also led to market participants looking out for other sectors to invest after the rally in public sector banking shares, said Shah.

Private banks to fare better in Q2?

Private sector banks have shown robust performance with strong-double digit profit growth in the previous quarter, which suggests a positive outlook for the upcoming Q2 earnings season for private sector bank stocks, said CA Manish Mishra, an independent analyst.

“The private sector banks are rising after their business updates for Q2FY24 showed healthy numbers. Thus, market participants believe that in the current interest rate environment where NIM compression will be seen, private banks will increase their net interest income sequentially,” said Shreyansh Shah.

Outlook for banking stocks

“From Q2FY24 onwards, there will be some NIM compressions and only the public and private sector banks that will have minimal impact on their NIMs will be preferred in the banking universe,” said Shreyansh Shah.

Instead of large-cap private banks, the small- and mid-cap banks are more likely to fare positively due to lower provisioning on improved asset quality.

In spite of the run-up in PSBs, there is room for mid-cap banks such as Union Bank of India and Indian Bank. In the private sector banks space, we believe that Karur Vysya Bank, Federal Bank and Karnataka Bank have still room left for the upside after their new strategies to penetrate the market, added Shah.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.