Shares of public sector banks cracked up to 12 percent on NSE on September 3, leading to a fall of nearly 5 percent in their sectoral index on NSE.
The weakness seems to be a fallout of the government's announcement of merger of 10 PSBs into four on August 30 and the worries surrounding it.
The Nifty PSU Bank index closed the day 4.87 percent down at 2,353. 80, with all components in the red.
Shares of Indian Bank (down 11.96 percent), Canara Bank (down 11.94 percent) and Union Bank (down 10.11 percent) emerged as the top losers in the PSU Bank index.
Shares of Oriental Bank of Commerce (down 9.99 percent), Punjab National Bank (down 8.94 percent) and Allahabad Bank (down 5.67 percent) also lost big.
The merger of PSU banks is being seen as a positive for the long term, but has short-term risks, according to brokerages.
"While the development is positive but it will take a long time for the better economics of scale to materialise and will face initial profitability pain. Merger ratio would be key to watch going forward which is yet to be announced and therefore investors are moving out of the PSU Bank counters," said Vikas Jain, Senior Research Analyst at Reliance Securities.
"The consolidation is a long-term plus and is based on the geographic presence and tech platform. However, the near-term growth may suffer as banks will focus on completing mergers," said global brokerage CLSA.
Morgan Stanley, too, believes PSB consolidation is a good long-term move but could weigh on near-term growth.
It maintained its underweight view on Punjab National Bank and Canara Bank on likely delay in PPoP (pre-provision operating profit) recovery and has reduced earnings estimate and target price across PSU banks, factoring in higher credit cost and dilution.
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