FIIs increase PSU exposure, trim stakes in private banks

HDFC Bank, India's biggest by value and largely considered the benchmark-setter in prudential banking over the past two decades, has seen its FII ownership shrink more than 6 percentage points to 36.26%. The story is similar at Kotak Mahindra Bank, where overseas fund ownership has fallen 5.48 percentage points by the end of June.

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FII equity in ICICI Bank is down 4.21 percentage points, Axis Bank 2.45 percentage points, and IndusInd Bank 4.31 percentage points. By contrast, their stake has climbed 4 percentage points in the Bank of Maharashtra. Bank of India (up 3.34 percentage points) and Bank of Baroda (up 2.06 percentage points) appear to be the other two major PSU lender beneficiaries from the shift in focus by FIIs. Analysts say that the FIIs are moving their money based on the returns they are getting. The premium that private sector banks enjoyed has diminished as public sector banks have caught up on a lot of parameters.

Vanishing Premiums

"In asset quality, underwriting and loan growth there is not much to choose between both these groups which means the thesis of PSU underperformance is no longer valid," said Siddharth Rajpurohit, an analyst at Systematix Shares and Stocks. "Large private banks are enjoying lower spreads on their retail loans like home and auto loans because of competition. The lines are now blurred, and investors have to cherry pick between banks - not merely PSU or private."

Canara Bank being the largest for this category of lenders.

Analysts say that the stock market performance of some private banks with high FII holdings — HDFC Bank, IndusInd and Kotak Mahindra — has been below average in the past few years because of diverse reasons.

“On the other hand, PSU bank profitability has improved as they have come out of their asset quality issues and subsequent restrictions imposed by the regulator,” said Anmol Das, research head, Swyon Advisors, an alternative investment fund.

“The government’s assertion that they will have to manage their own capital has also helped in a way. Corporate growth has also slowed; so there are no bulky defaults and the shift toward retail also means higher yields. All these factors are reasons FIIs must have taken a liking to these banks.”

Data analysed by ET shows that the Nifty PSU Bank index has risen 14.42% Since July 1, 2024, beating the 4.51% growth in the private bank index in that period. Indian Bank is the top gainer in that period with a 53% rise in its shares followed by a 26% gain by Bank of Maharashtra and Union Bank of India, respectively.

Yuvraj Choudhary, analyst, Anand Rathi Securities, said PSU banks have outpaced their private sector counterparts in return on equity (RoE) in the last two years. “Aggregate PSU RoE is 15% higher than the aggregate private bank RoE of 12%. PSU banks have outpaced their private sector counterparts for the last eight quarters and on course for the ninth one,” Choudhary said. “They have gained market share, improved asset quality and that is reflected in their book value.” Relative improved performance explains the diminishing premiums — and the increasing interest of FIIs toward state-owned lenders.

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