FIIs bought into Punjab National Bank (PNB) and Bank of Baroda (BoB) in the March quarter as pressure on interest margins and risks of further bad loans battered these stocks.
FIIs raised their holdings in BoB by 0.55 per cent to 16.67 per cent and by 0.08 per cent in PNB to 18.02 per cent, compared to the December quarter.
The March quarter shareholding pattern was not available for many other state-owned banks, including India's largest lender, the State Bank of India (SBI).
These investors were most active in Syndicate Bank, raising their stake in the mid-sized lender to 6.32 per cent during the March quarter against 4.69 per cent in the immediate previous quarter. In IDBI Bank, too, FIIs raised their holdings by 0.20 per cent during the period.
According to analysts, FIIs were buying partly because of cheaper valuations with many of them trading below their book values.
The CNX PSU Bank index fell 20 per cent in the March quarter against the 12 per cent decline in the Bank Nifty index and six per cent drop in the Nifty.
Domestic fund managers were selling as they were pessimistic about the prospects of public sector banks, because their balance sheets are expected to remain weak unless the economy picks up.
“Apart from asset quality concerns, pension liabilities and wage revision are some of the challenges on the operating cost front for these (public sector) banks,” said Hemant Kanawala, head - equity investments, Kotak Life Insurance
“Balance sheet at SOE (state-owned enterprise) banks is weak and it is likely to remain so with impaired loans close to double digit and large capital requirement under Basel III,” said Morgan Stanley’s analysts led by Anil Agarwal in a client note.
According to statistics available from the Securities and Exchange Board of India, in February, India’s equity fund managers had reduced their equity assets exposure to banks for the first time over the past five months.
“Cheap valuations were the only compelling reason why there would have been FII buying. However, upsides are likely to be limited from here,” said Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities.