Nifty PSU Bank down 15% this year; have these lenders lost their mojo?

After a stupendous run last year, PSU bank stocks have been witnessing strong selling pressure this year so far.

The banking sector has taken a hit amid a widespread selloff in the markets due to concerns over rate hikes, economic slowdown and the recent banking crisis.

The Nifty PSU Bank index is down almost 15 percent year-to-date (YTD) against a 7 percent fall in the Nifty Bank and private bank indices and a nearly 6 percent fall in the equity benchmark Nifty50.

All components of the Nifty PSU Bank index are in the red this year, with shares of Indian Overseas Bank, Central Bank of India, Punjab and Sind Bank and UCO Bank down over 20 percent each.

PSU bank stocks appear to have lost their mojo.

Why are PSU bank stocks under pressure?

After strong gains last year, PSU bank stocks attracted a fresh wave of profit-booking amid overall weakness in the market. Besides, the Adani-Hindenburg episode worked as a catalyst for profit-booking as it raised concerns over the exposure of PSU banks to the Adani Group.

Additionally, rising interest rates are also a negative for banking stocks.

"PSU banks stocks are down 10-20 percent from their highs due to multiple factors like the ongoing correction in equity markets, Hindenburg fiasco led to concerns about their exposure in Adani group stocks and some impact on their bond portfolio in rising interest rate scenario," said Abhishek Jain, Head of Research at Arihant Capital.

"There have been some concerns about rising interest rates also which can cause a slowdown in credit," said Jain.

Anmol Das, Head of Research at Teji Mandi, attributes the underperformance of PSU banking stocks to rate hikes.

"Increasing interest rates by the RBI since last May, and the increase in repo rate of 2.5 percent to 6.5 percent from 4 percent in less than a year is the primary reason for this underperformance. The rapid increase in interest rates is yet to be fully reflected in the cost of funds for the banks while on the other hand, it has slowed down the overall incremental credit growth of the banking sector. Hence, the PSU banks have come under some pressure," said Das.

What should you do with PSU bank stocks?

The short-term outlook for the PSU banking stocks is not too bright because of the prevailing concerns.

However, for the medium to long term, PSU banking stocks can be good bets. For the Indian economy to grow to a $5 trillion economy, the banking sector must grow and credit offtake must rise and banks are best placed to capitalise on it.

While some profit-booking looks logical in some PSU banking stocks, analysts are still positive about them as they believe domestic economic recovery will augur well for banking stocks.

Jain pointed out that PSU banks are perfectly placed with a pick-up in the rural economy. They have seen a cleaning up of their balance sheet between 2016 and 2021 and profits were at all-time highs for many banks.

"One can add large PSU banks like SBI, BOI, Canara, Indian Bank and PNB to the portfolio. Add in tranches. Valuations are still at a steep discount to their private sector peers," said Jain.

Aamar Deo Singh, Head Advisory, Angel One, advised accumulating PSU banking stocks in a staggard manner for the medium-term to long-term perspective.

"In the short run, the global headwinds, coupled with inflationary trends, could cause volatility in markets. Investors are advised to act prudently, and accumulate PSU banks in a staggered manner, from a longer-term perspective," said Singh.

Das of Teji Mandi believes the current correction in some of the large PSU banks is a good short-term entry position for several of the undervalued PSU banks, especially the four-six large ones right behind SBI in terms of their business size and in different stages of asset quality improvement.

Das said those banks will be discovering new ratings and valuation levels in the future.

He, however, cautioned that one should be very selective as some of the PSU banks have already achieved higher valuations during last year, and may not be able to increase valuations that rapidly from hereon.

"Investors should definitely book profits in those PSU banks which have gone above one-time price-to-book value and have not much room for asset quality improvement in further quarters," said Das.

"However, we believe the larger PSU banks can be bought and held at current or even higher levels as the overall banking sector has a major tailwind along with the buoyant domestic credit demand seen after the pandemic. Also, much lower levels of NPAs among the banks assure more returns than the risk they possess. Hence, we remain overall bullish for the PSU banking space," said Das.

Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.