PSB Stocks Slide Up to 9% in August – Time to Buy or Avoid?

Several public sector bank (PSB) stocks have faced significant pressure this August, causing their sectoral index to underperform compared to the Nifty 50, Bank Nifty, and private bank index.

The Nifty PSU Bank index has dropped almost 5% in August so far, while the Nifty Bank and Nifty Private Bank indices have each fallen by about 1%. Meanwhile, the benchmark Nifty 50 is down about 0.5% this month.

Stocks of PSBs, including Indian Bank, Punjab & Sind Bank, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, SBI, Union Bank, and Punjab National Bank, have declined between 5-9% in August.

Why Are PSU Bank Stocks Falling?

Experts say that disappointing Q1 earnings and a lack of new positive developments have dragged down PSU bank stocks.

“The PSU banking sector has been struggling due to inconsistent earnings, lack of growth drivers, and losing market share to private banks. We expect PSU banks to continue lagging behind private banks because of ongoing deposit challenges. Therefore, we remain cautious about investing in PSU banks,” said Jignesh Shial, Director of Research and Head of the BFSI sector at InCred Capital.

In Q1, public sector banks experienced slow business growth and tighter profit margins. Experts expect their net interest margins (NIM) to stabilize only in the second half of the year.

“The banking sector had a weak quarter due to slow business growth. NIMs should stabilize, and we expect public sector banks to see normal credit costs only after the first half of the financial year (H1FY25),” said Anil Rego, Founder and Fund Manager at Right Horizons.

Rego also mentioned that new investment guidelines have led to better investment yields for public sector banks, but deposits are coming at a high cost. This is causing NIMs to shrink, which will affect future results. He believes that earnings estimates have likely been lowered for FY25 and FY26, which has led to the recent correction in these stocks.

Another reason for the poor performance of public sector bank stocks is the heavy selling of financial stocks by foreign portfolio investors (FPIs) in August.

Anita Gandhi, Founder and Head of Institutional Broking at Arihant Capital Markets, noted that foreign investors sold ₹14,790 crore worth of financial services stocks in August, the highest selling by FPIs across all sectors during this period.

Gandhi also pointed out that public-sector banks saw healthy gains earlier due to better non-performing asset (NPA) levels and attractive valuations. However, this increase has narrowed the valuation gap between public and private-sector banks. Additionally, the Q1FY25 results of some public sector banks were disappointing, leading to profit-taking in many of these stocks.

She highlighted that stocks like Indian Overseas Bank and UCO Bank have valuations that are even higher than some private-sector banks, contributing to profit-booking.

“Since interest rates have likely peaked, growth in net interest income (NIMs) for the banking sector may be limited. Future profitability may depend on strong credit growth, which could be slowed by weaker deposit growth. We expect consolidation in public sector banks before the next upward trend,” said Gandhi.

PSB Stocks to Consider Buying

Despite the recent decline, experts are not very optimistic about the sector overall. They suggest being selective when buying PSB stocks.

Shial from InCred Capital recommends only SBI from the PSU space due to its strong loan growth, good loan-to-deposit ratio (LDR), stable margins, and strong retail presence. He also highlights SBI’s stable asset quality.

Ajit Mishra, SVP-Research at Religare Broking, believes SBI and Indian Bank are showing relatively stronger performance, making them good options for traders looking to benefit from a potential rebound in the PSU banking sector.

“Buying these stocks could be a smart move for those expecting a recovery in the sector,” said Mishra.