Mumbai: State-owned banks tumbled in Monday's trading after Union Bank of India said its deposit growth declined 2% sequentially for the third quarter ending December, raising concerns over the business prospects of these lenders. The Nifty PSU Bank index plunged over 4% during the session, while the benchmark Nifty declined 1.6%.Shares of Union Bank of India dropped 7.8% while Bank of Baroda and Punjab & Sind Bank slid 5.9% and 5.2%, respectively. Punjab National Bank, Indian Overseas Bank, Bank of Maharashtra and Bank of India tumbled over 4% each. All twelve stocks of the Nifty PSU Bank Index ended lower on Monday.117006658PSU vs Private banks"The 2% decline in deposit growth on a sequential basis for Union Bank led to the nosedive in public sector (PSU) bank stocks which indicates that private banks could perform better by attracting deposits to grow faster," said Jignesh Shial, head of BFSI sector at InCred Capital.The broader Bank Nifty index and Nifty Private Bank Index fell over 2% each.Shial said that private banks are expected to relatively outperform PSU banks given the favourable risk reward and underperformance in the last couple of months.In the last year, the Nifty PSU Bank index was up 8.83% while the Nifty Private Bank index declined 1.42%. The benchmark Nifty 50 has gained 9.8% in the same period."Most of the PSU banks that came up with a business update for the third quarter did indicate low deposit growth," said Christy Mathai, fund manager at Quantum Mutual Fund. "This implies advances could also be under constraint at some point."Private Banks CheaperMathai said although PSU banks outperformed private banks in 2024, there seems to be a shift in sentiment as most state-run banks are not as attractively placed compared to their private peers, and investors are likely to gravitate towards the latter.Fund managers said that as per RBI's commentary, the risks of stress from the unsecured loan book moving to the secured book also need to be watched out for."Apart from the larger PSU banks, the other players lack the ability to increase deposits and the systems to manage asset quality issues effectively as the private banks do," said Mathai. "Private banks are also better placed as they are cheap."PSU banks could underperform with SBI likely to be the outlier, but this doesn't necessarily imply that the best of PSU banks is over, said Shial. "PSU banks are expected to remain under pressure, but the asset quality issue is not likely to be a structural pain that could lead to any steep declines," added Shial. "Once the valuations come off in the segment, buying interest could be rekindled."
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