Banking Sector Divergence: PSU vs Private Banks

The recent performance of banking stocks has taken an intriguing turn, with notable divergence observed following the Reserve Bank of India’s (RBI) Monetary Policy announcement. While PSU stocks like State Bank of India (SBI), Bank of Baroda, and Punjab National Bank (PNB) surged on February 8, other public sector banks and major private players like Kotak Mahindra Bank, ICICI Bank, and Axis Bank faced significant declines.

The deviation in performance, according to experts, stems from previous events, notably the release of HDFC Bank’s results. Positive sentiments towards PSU banks are gaining traction among investors, while private banks face selling pressure from foreign institutional investors (FIIs), especially since January.

HDFC Bank’s disappointing results and challenges related to leadership transition have impacted private sector banks’ market performance. With state-owned banks appearing poised for growth and available at significantly lower valuations compared to private banks, investors are increasingly skeptical about paying high multiples for private sector banks.

Historically, PSU banks have lagged behind private banks in terms of P/E ratios, with the current average P/E standing at 19x for private banks and 11x for PSU banks. This disparity has led investors to seek greater comfort in PSU banks, reflecting the shifting dynamics within the banking sector.


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