Be careful of mid and small PSU banks, says Ajay Bagga

Ajay Bagga also believes in private banks and merely one year of underperformance should not change the long-term allocation towards them

PSU banks have outperformed the market over the past few months but investors have to be careful of the mid and smallcap names in the segment, Ajay Bagga, Chairman of Elyments Platforms, said in an interview with Moneycontrol on September 21.

"The smaller PSU banks have low floating stock. In the absence of absorption capacity, they will fall as fast as they have risen when a block comes to the market,” warned Bagga.

PSU banks such as UCO Bank, Punjab & Sind Bank, and Bank of Maharashtra have over 95 percent government shareholding and are on the divestment radar.

"1-2 percent allocation to these turnaround stories is okay but it can't be at 30 percent of your portfolio. That said, there are compelling arguments to look at larger PSU banks as the India story is strong, and lot of bad asset clean up has taken place over the past few years. They should do well," Bagga said.

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Over the past one month, the Nifty Bank index has delivered a 1.43 percent return. The Nifty PSU Bank index, on the other hand, has outperformed by delivering a 10.14 percent return over the past month.

Given private banks' underperformance compared to public sector counterparts, Bagga stated that investors can temporarily hold back from investing in private sector banks, however, it is still not time to pull out completely. “Don't exit the existing exposures,” he said.

Private banks have 'excellent management and brilliant models' and merely one year of underperformance should not change the long-term allocation towards them, the market expert said.

“In a growing economy like India, private sector banks will be the most efficient allocators of savings and they will perform very well,” Bagga added.