PSU banking stocks continue to witness a heavy sell-off on Tuesday, June 4, as the BJP-led National Democratic Alliance was inching closer to the 300-mark, but appeared to be falling short of the overwhelming majority forecast by most exit polls.
Most exit polls on Saturday projected that the ruling BJP will return to power with a thumping majority, winning seats between 316 to 400 seats in the Lok Sabha elections.
The Nifty PSU Bank index was down more than 1,400 points or 17.55% at 6,599.85, registering its biggest single-day fall since April 2021.
Out of the Nifty PSU Bank pack, Bank of Baroda shares tumbled the most, falling 20%. Canara Bank was also down 20% to trade at ₹102.60. State Bank of India Ltd (SBI) and PNB slipped 15.34% and 17.28%, respectively.
Meanwhile, IOB, Bank of India and Bank of Maharashtra also plunged between 16-20%.
"This sharp correction can be attributed to mounting concerns over rising interest rates impacting credit growth and profitability. Additionally, fears surrounding the asset quality of banks due to exposure to a troubled housing finance firm fueled the sell-off," said Atul Parakh - CEO, Bigul.
Shreyansh V Shah, Research Analyst at StoxBox believes the outlook for the PSU Bank remains positive in the medium term.
"We believe that the stocks of public sector banks have not seen any fundamental shift. However, due to market sentiments, panic has been seen in these stocks. Analysing the Q4FY24 results, which showed a significant improvement in asset quality, we believe that apart from sentimental value, no major factor has led to the plunge in their share price," Shah said.
On Monday, PSU banking stocks also saw a sharp uptick with the Nifty PSU Bank hitting an all-time high of 8,053. The index had surpassed its previous high of 7,685.95 touched on April 30, 2024.
Earlier last week, domestic brokerage firm Motilal Oswal remained overweight on financials and PSU banks, favouring ICICI Bank and SBI.
Although, Kotak Institutional Equities in its report said it finds a little value in the current market as most sectors and stocks are overvalued.
"Many narrative and PSU stocks are trading at outlandish multiples and are factoring in optimistic volume and profitability assumptions. A large BJP victory may sustain rich-to-bubble multiples in parts of the market (automobiles, capital goods, PSUs) for longer, but we would be surprised if many of the lofty embedded expectations come to fruition," Kotak said.
Speaking to CNBC-TV18, Nilesh Shah, MD and CEO of Envision Capital highlighted that sectors like PSUs, infrastructure, and capex-oriented sectors have seen significant price appreciation driven by PE rerating and higher market confidence.
Shah predicts a softening of PE multiples for PSUs if the NDA ends with a seat tally of around 300, prompting investors to potentially reallocate funds from these overvalued sectors to others.
