Nifty PSU Bank index up 26% year-to-date; does this rally have more legs? Experts weigh in

Shares of most public sector undertaking (PSU) banks have been on a solid uptrend this year so far, boosting their sectoral index. Until July 24, the Nifty PSU Bank index has jumped 26 per cent this year so far against a 6 per cent gain in the Nifty Bank index and a 3 per cent gain in the Nifty Private Bank index.

The sharp rally in the PSU banking stocks was primarily driven by strong credit growth and improved balance sheets. However, the sector lacks fresh triggers, and experts believe the road ahead could be challenging.

The Budget 2024 also did not offer anything significant to the sector, which has dimmed its outlook.

"The Budget 2024 offered little clarity for PSU banks. There was no mention of recapitalisation plans, a crucial issue for these banks. While there were brief discussions on the Insolvency and Bankruptcy Code (IBC) process, there were no significant positive announcements impacting the PSU banking sector," said Abhishek Jain, the head of research at Arihant Capital.

"The Budget provided limited positive news for PSU banks. Their success hinges on overcoming existing challenges and potentially increased loan demand later in the year," Jain said.

Even beyond the Budget, Jain underscored that PSU banks face several challenges.

"Attracting deposits remains an issue, and loan growth, particularly at the corporate level, is slowing down. It's unclear if this slowdown is due to pre-election caution or a more structural problem," said Jain.

While an increase in loan demand is expected in the second half of the year, this needs to be monitored.

Jain observed that corporations might be cautious about borrowing due to a higher base from the previous strong year.

However, some experts believe the sector's prospects are still healthy and the stocks from the sector may still have some steam left.

Atul Parakh, the CEO of Bigul, pointed out that the PSU banking sector's future appears promising despite saturation concerns as recent developments paint a cautiously optimistic picture.

"PSU banks have demonstrated strong credit growth and improved balance sheets, reducing the immediate need for government recapitalisation. This financial strength positions them for future expansion," said Parakh.

Moreover, Parakh also underscored that the Budget 2024 prioritises infrastructure and MSME development, which are potential growth areas for PSU banks with their extensive branch networks. The focus on financial inclusion also aligns with their existing strengths.

However, challenges remain.

"Competition from private banks and Fintech players is fierce. To maintain market share, PSU banks will need to continuously enhance customer service, product offerings, and digital adoption. Streamlining internal processes and leveraging technology are also crucial for improving efficiency and profitability," said Parakh.

Parakh suggests selective investment in well-positioned PSU banks who has a focus on growth strategies, digital adoption, and ability to navigate a competitive landscape.

The Nifty PSU Bank index fell over a per cent in intraday trade on Thursday, July 25. The index, however, pared most losses and traded about half a per cent down around 2:10 pm.

Mandar Bhojane, an equity research analyst at Choice Broking, pointed out that the Nifty PSU Bank index is currently exhibiting a consolidative pattern, characterised by trading within a defined range. According to him, as per the current technical outlook, the strategy of investors should be buying-on-dips, targeting specific support levels for entries.

"Key support levels are identified at 7,000, followed by 6,800 and 6,550. These levels are crucial as they represent areas where buying interest is expected to emerge, potentially leading to a rebound in prices," said Bhojane.

"On the upside, the index encounters a substantial resistance at 7,570. If sustained above this level, the index has the potential to move towards upside targets of 7,800 and 8,000. Stocks like SBI and Bank of Baroda are suggested for buying on dips, complementing the broader approach within the PSU banking sector," said Bhojane.

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