PSU bank stocks witnessed healthy buying interest in morning deals on Wednesday, 26 August, driving their sectoral index, the Nifty PSU Bank, higher by nearly 2% despite cautious market sentiment.
Nifty PSU Bank index rose by 1.8% in morning trade, with stocks such as Bank of Maharashtra, Bank of India, Canara Bank, Punjab National Bank, and SBI, jumping between 1% to 6%.
The PSU banking stocks are not witnessing a sudden spurt. In fact, the Nifty PSU Bank index has risen by 4% this month so far, compared to a 0.60% rise in the Nifty Private Bank index, and a flat with negative bias Nifty 50.
Why are PSU banking stocks rising?
The rise in PSU bank stocks can largely be attributed to healthy Q1FY27 results.
Despite a challenging macro environment due to currency weakness and rising crude oil prices, the asset quality of many PSU banks surprised positively, with lower YoY slippages.
Moreover, softer bond yields hand PSU banks outsized treasury gains given their larger SLR books, and the persistent consolidation narrative keeps optionality alive across the smaller names.
To some extent, sector rotation has also contributed to the outperformance of the PSU banking stocks.
“The 4% versus 0.60% divergence this month is a rotation with real reasoning behind it, not a speculative flare,” said Harshal Dasani, Business Head at INVAsset PMS.
Dasani sees four key drivers behind the rally in PSU banking stocks.
First, Q1 delivered where it mattered, with the earnings season producing sharp moves like Indian Bank’s 10% post-results jump and broad participation across PNB, Union Bank, Canara and Bank of India, confirming this is sector-wide rather than one name’s story, said Dasani.
Second, and most importantly, the margin arithmetic currently favours PSU banks.
According to Dasani, private lenders are absorbing NIM (net interest margin) compression because their loan books reprice downward faster than deposits, which is exactly what Axis flagged in calling its 3.46% margin a cycle bottom. PSU banks, with higher CASA-driven deposit franchises and a larger share of fixed-rate and government-linked lending, are less exposed to that squeeze in the current phase, Dasani added.
The third factor is valuations. Since PSU banks still trade at meaningful discounts to book despite gross NPAs sitting at multi-decadal lows, every quarter of clean asset quality shrinks the risk premium that was justified a decade ago and is harder to justify now, Dasani explained.
Fourth, credit and deposit growth momentum has been visibly strong, with Canara’s advances up nearly 18% YoY in its early business update, setting the tone for the pack.
