PSU bank stocks tumble up to 10%. Should you buy the dip?

With Nifty dropping below the 18,000 mark in Friday's trade amid fear related to the Fed rate hike and rising covid cases in China, shares of PSU banks were the worst hit. Shares of Indian Overseas Bank, UCO Bank, Central Bank of India and Bank of Maharashtra tumbled up to 10% in today's session on BSE.

Indian Overseas Bank was the top loser as the stock fell 10% to Rs 27.5 per share. Among other PSU bank stocks, UCO Bank fell 9.9%, Central Bank of India 9% and Bank of Maharashtra 8%. The Bank of India, Union Bank of India, Indian Bank, PNB and Punjab & Sind Bank also plunged over 5%.

However, 2022 has been the best year in five years for PSU bank stocks.

In 2022, while there were board-based gains in the banking pack, it was public sector banks that stole the show. State-owned banks gave their best-ever gains in at least a decade. Nifty PSU Bank index had risen nearly 53% in 2022, the highest ever in the last 10 years.

Is this the end of the rally in PSU banks?
Money managers do expect the banking pack to remain on top of the betting list in 2023 as a recovery in the domestic economy will see the sector leading earnings growth for India Inc.

In Q2, most PSU banks reported stellar earnings coupled with improvements in asset quality and rising credit growth numbers. Besides, they also reported healthy NIMs, which analysts believe might be sustainable for another quarter as rising deposit rate hikes may be passed with a lag.

“PSU banks were up 74% in the last six months. Post the phase of significantly higher GNPA, treasury MTM losses, lower capital & sub-par growth, there has been a turnaround with comfort on asset quality; reversal of treasury losses, credit growth pick-up and just adequate capital position for most of them,” domestic brokerage firm ICICI Direct said.

“With a recovery in growth and stable asset quality, PSU banks are set for a further re-rating. Large PSU banks (SBI, BoB, Canara Bank) are trading at ~0.8-1x P/BV, which paves the way for a further re-rating as peak valuations remain at ~1.2-1.5x in FY12-14. Mid-sized and small banks, currently trading at 0.5-0.7x P/BV, touched ~1x then. We remain positive on PSU banks, with upsides expected to continue in the medium-term horizon,” it said.

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