PSU Banks Surge as FIIs Trim Stakes in Private Giants Amid Vanishing Premiums

PSU Banks Surge as FIIs Trim Stakes in Private Giants Amid Vanishing Premiums​

Foreign Institutional Investors (FIIs) are increasingly favouring Public Sector Banks (PSBs), showing a clear shift away from private sector lenders. An analysis by ET indicates that while several top-tier private banks saw declining FII holdings, PSBs have become a major magnet for institutional capital over the past year. This trend suggests that the premium enjoyed by private lending institutions is diminishing as state-run competitors rapidly close performance gaps across key metrics.

FII Divestment from Private Banking Majors​

Major privately held banks are facing scrutiny regarding their valuation and FII exposure. HDFC Bank, historically considered a benchmark in prudential banking and India's largest by value, saw its FII ownership shrink by more than 6 percentage points to 36.26%. Similarly, Kotak Mahindra Bank experienced a decline in overseas fund ownership of 5.48 percentage points as of June.

FII equity holdings also decreased in ICICI Bank (down 4.21 percentage points), IndusInd Bank (4.31 percentage points down), and Axis Bank (2.45 percentage points). In stark contrast, the financial health of these institutions is being closely monitored by investors as competition heats up across retail lending portfolios.

PSU Banks Rally as Performance Improves​

The trend mirrors improved performance and stable growth within public sector lenders. FII stakes have climbed in several PSBs, including Bank of Maharashtra (4 percentage points increase). Bank of India saw a rise of 3.34 percentage points, while Bank of Baroda benefited from an increase of 2.06 percentage points.

Analysts point out that the market shift reflects better PSU performance coupled with corporate governance challenges at some private banks. Anmol Das, research head at Swyon Advisors, noted that PSU profitability has risen as these banks successfully navigated asset quality issues and regulatory restrictions. This improvement, combined with slower corporate growth leading to fewer bulky defaults, is attracting FII interest.

The Convergence of Lending Standards​

The lines between public and private lending institutions are becoming blurred due to increasing market competition. Siddharth Rajpurohit, an analyst at Systematix Shares and Stocks, stated that in terms of asset quality, underwriting standards, and loan growth, there is little differentiation between the two groups. This means the long-held thesis of inherent PSU underperformance is no longer considered valid by investors.

Large private banks are now contending with lower spreads on their retail loans, such as home and auto loans, directly due to this competition. Consequently, FIIs must now move beyond a simple binary choice between PSU or private sector; careful selection among individual banks is paramount.

Return Metrics Reveal PSBs' Ascendancy​

The financial data supports the trend of superior returns offered by PSBs. The Nifty PSU Bank index rose 14.42% since July 1, 2024, significantly outpacing the private bank index growth of 4.51% over the same period. Indian Bank emerged as the top gainer in this timeframe with its shares rising 53%, followed by Bank of Maharashtra and Union Bank of India, which gained 26%.

Yuvraj Choudhary of Anand Rathi Securities highlighted that PSBs have consistently outperformed their private counterparts regarding return on equity (RoE). Aggregate PSU RoE stood at 15% higher than the aggregate private bank RoE of 12%. This sustained performance improvement explains the diminishing premium for top-tier private lenders and reinforces FIIs' growing interest in state-owned institutions.