The PSU Bank shares in the current bull run are seeing a correction now and this is after investors have been awarded stupendously over the past one year. In Wednesday's session, despite an overall mixed market momentum, the PSU Bank index traded weak by over 0.6 per cent.

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From the pack, majority of the stocks barring Central Bank of India, Maharashtra Bank, Indian Overseas Bank traded in the green, while all others including PNB, Bank of Baroda, Union Bank of India saw losses up to 1 per cent. Nevertheless, UCO Bank traded steady at the last count.

So, as the stock prices of these stocks are in declining trend and have tumbled up to 8 per cent in the last one month, including stocks like SBI, Union Bank of India and UCO Bank among others, here is how analysts view the PSU Banking stocks to perform

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities held that during June quarter of FY25, PSU banks under their coverage had a stable quarter. backed by retail or SME segment, while growth in the corporate segment was low. Deposit growth was disappointing during the quarter, with term deposits leading the way as CASA ratios continued to decline. As a result, the C-D Ratio for PSU Banks increased slightly, but they still remain in a comfortable position compared to their private banking peers. NIMs during the quarter witnessed compression largely owing to CoF or cost of funds pressure. Opex ratios moderated as the impact of wage revision was behind. Asset quality trends reflected seasonality.

Raj Gaikar, Research Analyst, SAMCO Securities said the PSU Banks (PSBs) have exhibited a strong performance in Q1FY25 showcasing the substantial growth in their Profit After Tax (PAT) and a significant reduction in Non-Performing Assets (NPA). It has overshadowed the private banks in Q1FY25.
 
The PSU Banks marked improvements in asset quality as NPAs exhibited a downward trajectory both on a Q-o-Q and Y-o-Y basis. However, the PSBs have faced headwinds as the CASA (Current Account Savings Account) ratio showed sluggish growth. The Net Interest Margin (NIM) remained stable and deposit growth remained the main concern in for the PSBs. as it lagged behind loan growth, signalling potential liquidity constraints.

In contrast, Atul Parakh, CEO of Bigul held that the recent quarter for PSU banks provides a pessimistic outlook in the near term owing to the challenges faced concerning rising credit cost. However, the improvement in cost ratios due to wage revisions was a positive sign. The credit growth in the recent period was primarily driven by retail and SME segments. Corporate credit growth remained subdued due to overall competitive pressure in the overall banking landscape.

Fee income growth was in line with analyst estimates due to expansion in business activities and increased investments, which contributed to elevated operational expenses, added Parakh. 

Outlook on PSU Bank stocks

Vaidya held that it is anticipated that credit growth for PSU Banks will continue to be strong, with continued momentum in retail and SME loans and a gradual pick-up in corporate lending. Deposit growth is also expected to improve gradually. As a result, Net Interest Margins (NIMs) are likely to remain stable, supported by the near peak out of Cost of Funds (CoF) and the potential for improvement in the Credit-Deposit (C-D) ratio. Operating expense ratios are projected to stabilize at their current levels, which seem to be the new normal. We do not perceive significant asset quality concerns, except in the unsecured segments, which is an area requiring close monitoring

Therefore, we do not foresee a substantial increase in credit costs, although a gradual normalization may continue. Hence, we do not anticipate any major obstacles for PSU Banks to sustain their Return on Assets (RoA) delivery of approximately 1 per cent over the medium term, Vaidya added.

Following an extended rally, the short-term correction appears constructive, positioning PSBs favourable for the long-term outlook, added Gaikar. 

PArakh meanwhile noted that while the near-term outlook for PSU banks contains bleak prospects, the long term growth trajectory for PSU banks remains optimistic due to increased government support and initiatives and the overall advancement and growth of the Indian economy, remarks Parakh.