SBI, Canara Bank to BoB: Why are PSU bank stocks the worst hit amid stock market crash? Explained

Even though the Indian stock market is witnessing a sharp selloff across sectors, the PSU banking space is suffering deeper losses. In intraday trade on Monday, March 9, the Nifty PSU Bank index crashed more than 6%, while the Bank Nifty plunged more than 4%. Equity benchmark Nifty 50 dropped more than 3% during the session.

Shares of SBI, Canara Bank, Bank of Baroda, and Punjab National Bank crashed 4-6%. Among the private bank peers, shares of HDFC Bank and ICICI Bank crashed up to 5% during the session on Monday.

In the previous session, the PSU banking index declined 2%. On a monthly scale, the Nifty PSU Bank index has crashed 11%, looking set to snap its six-month winning streak.

Nifty Bank is down 8% in March so far after ending in the green for the last two consecutive months.

Why are PSU banking stocks falling heavily?

One of the reasons behind the fall in the PSU banking stocks is the rise in bond yields amid a sharp jump in crude oil prices driven by the US-Iran war and concerns over its impact on India's macro health.

Investors are selling bonds, which is lifting yields. Bond prices and bond yields move in opposite directions.

India's benchmark 10-year bond yield has risen almost 2% since Friday, March 6. At present, 10-year bond yields are at 6.75%.

Rising bond yields weigh on PSU banking stocks as they invest a significant portion of their deposits in government bonds. When bond yields rise, bond prices fall, leading to mark-to-market (MTM) losses on banks’ bond portfolios. In simple terms, rising bond yields directly reduce the treasury income and profits of PSU banks.

The other factor why PSU banking stocks are the worst hit in the current selloff is that they have been outperforming the market for the last several months. At the current juncture, when the market outlook has turned hazy due to geopolitical factors and the macro outlook has taken a hit, investors are pulling out their money from the banking stocks as they are considered to be the proxy for the country's overall economic health.

"Banking is a good proxy for the overall macroeconomic outlook and consumption trends. The sector had already performed well relative to the broader market, particularly PSU banks. What we are seeing now is some profit-taking in PSU banks and the banking sector in general," Pankaj Pandey, the head of research at ICICI Securities, noted.

Pandey added that a meaningful change in the outlook for the banking sector will happen only if this US-Iran war continues for a sustained and longer period. Otherwise, the current correction appears more like profit-taking rather than a structural shift in fundamentals.

"Banking stocks, particularly PSU banks, have been under some pressure recently, and rising bond yields are one of the key reasons behind it. When bond yields move higher, the value of government bonds held by banks tends to decline, which can impact treasury income and short-term profitability," Ravi Singh, Chief Research Officer (advisory and research) for Master Capital Services, explained.

"Along with that, global uncertainty has also made investors slightly cautious about cyclical sectors like banking. Another factor is profit booking. PSU bank stocks had rallied strongly over the last couple of years, so some investors are now locking in gains amid the uncertain global environment," said Singh.

Ajit Mishra, SVP of Research at Religare Broking, also told Mint that PSU banks have performed strongly in recent months, and market participants are now considering booking profits, anticipating the possibility of a decline in sectors that have remained relatively resilient so far.

A sharp rise in crude oil prices has raised concerns over an inflation flare-up in the coming months. This may prompt the Reserve Bank of India (RBI) to change policy stance and even raise interest rates, which will negatively impact banks' margins.

"Apart from rising bond yields, the sharp increase in crude oil prices is raising concerns about inflationary pressures, which could potentially lead to a pause or even a reversal in the interest rate cycle," Mishra noted.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.