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News Topical, Digital Desk : The bullish momentum on PSU banks appears to be fading. In its latest report, global brokerage Macquarie has recommended tactical shorts on Bank of Baroda, PNB, and Canara Bank, while suggesting SBI as a hedge position. The brokerage believes that the strong performance of the second half has already been priced in, and further upside potential is limited. Additionally, new ECL norms, weak recoveries, and falling NIMs could further pressure PSU banks' ROA.
Indian PSU banks have seen a spectacular rally over the past few months, but a new report from Macquarie has cautioned investors.
The brokerage believes that current valuations of PSU banks are too far advanced and could lead to pressure in the coming months. Macquarie has recommended tactical shorts on three banks : Bank of Baroda , Punjab National Bank (PNB) , and Canara Bank. SBI has been held as a hedge position , meaning that if PSU banks weaken, its stability could balance the portfolio. Macquarie Report: 4 Key Takeaways 1. Strong H2 performance already factored into price Macquarie says the market has already discounted the excellent H2 performance of PSU banks. This means the stocks have already risen significantly. The scope for further upside is limited. Most of the optimism has already played out. Therefore, there is less room for upside in these stocks. 2- New ECL norms + weak recovery = pressure on ROA. The Expected Credit Loss (ECL) norms, which will come into effect from 2026, could prove to be a major setback for PSU banks. Due to ECL, banks may have to maintain higher provisions than before. This will directly impact their earnings and ROA (Return on Assets). Macquarie believes that recovery rates are also weakening, creating additional pressure on the balance sheets of PSU banks. Pricing wars in mortgage and corporate loans have led to a decline in NIMs. Banks are aggressively pricing in the housing loan and corporate loan segments. What will be the impact? Interest margins (NIMs) will decline, loans will increase, but profits will decline. Due to competition, banks are forced to reduce rates. A decline in NIMs means that bank earnings are bound to be directly impacted. 1% ROA level - now probably at peak - Macquarie says that the ROA of PSU banks is currently at 1%, which is the highest level seen in a long time. But there is a problem with this - - This level is completely priced-in in valuations. - There is very little possibility of further ROA increase. This means that the shine of PSU banks is probably at its peak now and returns from here appear limited. Caution is needed in PSU banks now. A major part of the boom has passed. New norms and margin pressure may stop further rally. SBI is a comparatively safe option.
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