Bank of Maharashtra to SBI: State-owned bank stocks fuel Nifty PSU Bank up 2%; can PSU banks improve margins ahead?

State-owned banking companies like Bank of Maharashtra, Bank of Baroda, among other PSU bank stocks, powered the sectoral benchmark Nifty PSU Bank up around 2% during the trading session on Wednesday, August 26, as investors focused on falling oil prices and improved hopes for margin gains in the upcoming period.

Stocks like Bank of Maharashtra, Bank of India, Indian Bank, Bank of Baroda, and SBI were among other heavyweights providing major support due to heavy buying momentum in the sector amid a flat market.

NSE data showed the Nifty PSU Bank index surged 1.8% to touch an intraday high of 8,762 points on Wednesday’s market, in comparison to 8,603.65 points at the previous equity market close.

After touching the day’s high, the index retracted some of its gains, trading 1% higher at around 8,694 points during the trading session on August 26.

Market experts predict that PSU banks are expected to witness a marginal improvement in profitability in the upcoming period and resilience on the margin front, while concerns remain about the Reserve Bank of India’s ECL method in the medium term.

On Wednesday, investors were also focused on lower oil prices as energy rates have a direct impact on the increasing or decreasing inflation risk in the market. This fluctuation in energy prices has a tendency to fuel speculative price action in government securities.

A lower oil price essentially reduces the rate hike uncertainty against the backdrop of cooling inflation fears, while increasing bond yields as India imports most of its oil. As banks hold a significant amount of these government securities, a reduced and stable oil price, in turn, increases the potential for treasury earnings in a period.

PSU Bank stocks today

Can PSU banks improve margins ahead?

Experts from the global investment firm Bernstein said that there is a convergence happening between private and public sector banks; however, they expect that the private banks' outperformance remains distant from current levels.

Looking ahead, the analysts also said that the PSU Banks are showing resilience on the margins front, which is expected to, in turn, increase their profitability marginally in the upcoming period.

“Asset quality remains pristine; ECL is the key medium-term risk for PSBs,” said the analysts.

For the sector, the market experts predict that investors should monitor the convergence in growth rather than expecting a sharp reversal in the trend.

The banking stocks have been gaining consistent momentum in the market as the PSU banks maintained their healthy business operations in the June quarter with strong growth in advances, deposits, and overall interest income in the period.