Recent correction may have prepared three PSU bank stocks for a rebound

PSU banking stocks have undergone significant corrections over the past few weeks, and many analysts believe that a recent spike in select names from the space may be an early sign of a stronger move up ahead.

Union Bank of India, Indian Bank, Canara Bank, Bank of Maharashtra, UCO Bank, IDBI Bank, Indian Overseas Bank and Punjab National Bank shares have risen 4-6.8 per cent in the past week, a period in which the Nifty Bank gained a modest 0.4 per cent. PSU banks' outperformance to the rest of the banking basket, and their private sector counterparts in particular, is also reflected in a 3.1 per cent rise in the Nifty PSU Bank index during the week, sharply outshining a mere 0.5 per cent gain in the Nifty Private Bank.

The PSU banking space has bucked an overall weak trend in the market so far in Samvat 2080, the New Year as per the Vikrami calendar that began with a special, one-hour trading session on the day of Diwali. All eyes globally are on a key US inflation reading, due later on Tuesday, that may offer more clarity on the course of benchmark interest rates in the world's largest economy, and the rest of the globe, in the coming months.

The PSU banking index has run up a good 20 per cent so far in 2023 and delivered a one-year return of 38 per cent, far better than year-to-date and one-year returns of 6.9 per cent and 6.1 per cent in the Nifty50, and 1.6 per cent and 4.3 per cent in the Nifty Bank.

So, should you go about chasing any and every dip in the PSU banking space now?

Several PSU banking stocks have registered healthy corrections over the past few months amid persistent selling by foreign institutional investors (FIIs), say analysts. As major problems facing the banking industry seem resolved to an extent, the overall outlook remains strong for the basket, they add.

Banking majors Q2 earnings recap

At most of the banks, some of the key parameters including NII or net interest income has registered growth, credit cost and provisioning, on the other hand, has reduced. Also the asset quality, measured with respect to NPAs or non-performing assets has improved, reflecting resilience in the sector. 

SBI has posted a good set of Q2 results but with 2 major pointers worth investors’ focus. NIMs are seen to shrink by 3-5 basis points going ahead, while additional provisions shall be made for wage revision. However, the lender posted the best-ever Return on Equity (RoE) during the quarter. 

Punjab National Bank posted strong results suggesting strong growth and remarkable improvement across key parameters. The PSB major for Q2 posted a 327 per cent year-on-year growth in its net profit.

"Q2 has been a mixed bag for PSU banks as credit growth for most banks was reasonably strong. The quarter saw healthy recoveries which led to improvement in Asset quality with GNPA/NNPA ratios improving towards decadal low levels. Lower provisions were also seen aiding the earnings growth. However, the NIMs came under pressure owing to the rising cost of funds, and the same is expected to continue. This was the key negative in the Q2 results for the PSU banks," Jyoti Roy, Head of Equity Research at Sanctum Wealth on the earnings of PSU Banks told Zeebiz.com.

Technical view

"This correction is indicating a reversal on charts now, principally for Canara Bank, Union Bank of India and Indian Bank," said Avdhut Bagkar, Derivatives and Technical Analyst at StoxBox.

"On Monday, Canara Bank and Indian Bank set a new 52-week high, taking out previous barriers with aggressive volumes. Union Bank of India on other hand is shy of Re 1 to clock its new high... Canara Bank has formed an inverse head and shoulder pattern fueling a medium-term bullishness. Price action is headed towards Rs 460 and Rs 500 levels, which are its next resistance marks. Support exists at Rs 370," he said.

Technically, Indian Bank continues to trade with a higher high and higher low formation, indicating fresh bullishness, according to Bagkar. "Until this pattern continues to hold successive support, the trend is likely to continue. Supports are placed at Rs 420 followed by Rs 390, with price action hinting at Rs 520 and 550 levels," he said.

"Following a decent accumulation in the range of Rs 100-95, a breakout move in Union Bank of India is highly anticipative. A move over Rs 114 shall trigger next upside in the stock that could eventually rally towards Rs 150 level," he added.