Nifty PSU Bank Near 52-Week High: What's Behind PSB Stocks' Surge, Is There More Upside?

Public sector banks extended their winning streak for the third consecutive session on Wednesday, with the Nifty PSU Bank Index surging 2.7% to hit an over one-month high. Wednesday's close took the index close to its 52-week high.

The rally was led by Bank of Maharashtra, Punjab National Bank, and State Bank of India, as investor sentiment turned positive after government assurance on stake holding and strong sector fundamentals.

Bank of Maharashtra gained 4.09%, touching an intraday high of Rs 57.46 on the NSE. Indian Bank, Central Bank of India, UCO Bank and Canara Bank also saw gains of up to 2.7%. PNB added nearly 2% to reach an intraday high of Rs 110.48, while SBI extended its momentum on sustained investor appetite.

The surge in PSU bank stocks followed comments by M Nagaraju, Secretary of the Department of Financial Services, who clarified that there was no proposal to reduce the government’s stake in PSBs below 51%. This reassurance quelled market concerns about potential aggressive stake dilution.

"The move is aimed at meeting SEBI’s 25% minimum public shareholding norm, which requires the government to pare its stake by offering more shares to the public," said Hariprasad K, SEBI-registered research analyst at Livelong Wealth.

Analysts expect this to happen through selective stake sales while retaining majority control.

"Improved credit growth, healthy earnings, and government commitment to maintain over 51% ownership in PSU banks have boosted investor confidence," said Om Ghawalkar, market analyst at Share.Market.

Banking indices have shown diverging trends over the past year. In the past three months, the Nifty PSU Bank Index has risen 6% compared to a 0.4% decline in Nifty Bank and a 2% drop in Nifty Private Bank.

Over the six months, PSU banks have surged 26%, outpacing both Nifty Bank, which is up 15% and Nifty Private Bank, which rose 13%. While both private and PSU banks have contributed to sectoral growth, the latter have outperformed significantly in recent quarters.

The outperformance of PSU banks is being driven by multiple factors. The net-interest-margin contraction has been relatively contained in the range of 6–18 basis points, whereas private banks have witnessed sharper pressure across the board.

Asset quality for PSBs has remained stable, with no unusual stress and moderated credit costs, unlike private banks that saw seasonal stress in credit cards and microfinance.

On the lending side, most PSU banks, barring Union Bank and PNB, outpaced industry credit growth, while private banks lagged behind non-food credit growth.

Profitability for PSBs also received support from treasury gains, operating leverage, and contained credit costs, whereas private banks reported pressure on profit growth due to higher credit costs and margin contraction.

The index could, in the short term, see some upside as it is well-positioned to sustain momentum, supported by both domestic fundamentals and favorable external factors.

In addition, the US Federal Reserve's rate cut will also help the banks by spurring credit growth and market sentiment. "This easing could amplify the PSU banks’ rally in the coming week. However, short-term market reactions may remain cautious as investors closely watch the global cues," added Ghawalkar.