PNB, SBI, UCO: JM Financial lists 11 PSU bank stocks worth buying after selloff

Since reaching its 52-week high, the PSU Bank index has dropped by 15%, with banks like UCO Bank, Bank of India (BOI), Indian Overseas Bank (IOB), and Union Bank of India seeing sharper declines of 25-30%.

In Short

• UCO, BOI, IOB among banks seeing 25-30% stock decline
• PNB, SBI, Canara Bank face modest drops, but showing recovery
• PSU Bank index finds support at 200-day EMA, signaling strength

A sharp decline in PSU bank stocks following the 2024 general election results has created a fresh buying opportunity, according to JM Financial. The brokerage expects the PSU Bank index to outperform the Nifty in the near future, highlighting 11 banks as strong contenders.

Since reaching its 52-week high, the PSU Bank index has dropped by 15%, with banks like UCO Bank, Bank of India (BOI), Indian Overseas Bank (IOB), and Union Bank of India seeing sharper declines of 25-30%.

Other major players such as Punjab National Bank (PNB), Central Bank of India, Bank of Baroda (BOB), and Bank of Maharashtra fell between 18-22%, while Indian Bank, Canara Bank, and State Bank of India (SBI) experienced more modest declines of 12-15%.

Despite these losses, JM Financial sees signs of recovery.

The index, which recently dipped to 8,053 levels, found support around its 200-day exponential moving average (EMA) and has since rebounded, indicating further strength.

The brokerage believes that this significant drop offers an opportunity for investors to reconsider PSU bank stocks, forecasting that the index is set to outperform the broader Nifty index in the months ahead.

"We believe this significant drop offers an opportunity to re-evaluate the sector, with expectations that the PSU Bank index is more likely to outperform the Nifty in the future,” the brokerage said.

Historically, the PSU Bank index has performed well in October and November, noted JM Financial.

Over the past decade, the index has posted positive returns seven and eight times, with average gains of 7% and 6%, respectively. In the previous correction phase between December 2022 and March 2023, the index similarly found support around its 200-day EMA before staging a robust recovery.

The brokerage said key technical levels indicate that the index faces immediate resistance at 7,083, a crucial point above which it could negate its current trend of lower highs and lower lows.

"Support in the index continues to prevail at 6,500-6,600 levels, coinciding with its 200-day EMA zone. The range further coincides with the support zone observed during the period February 2024, March 2024 and June 2024," it said.

In the derivatives (F&O) market, there has been a notable lack of aggressive selling, with no significant rise in cumulative futures open interest. This suggests that sellers are not taking strong positions at current levels. However, open interest in specific stocks such as PNB and Canara Bank has increased by 15% and 14%, respectively, while SBI saw a 6% rise.

On the other hand, BOB has witnessed some unwinding of open interest.

The ratio of the PSU Bank index relative to the Nifty has declined by 23% from its June peak, suggesting that the sector has underperformed significantly. The current ratio is trading close to a long-term trendline support zone, which has acted as both resistance and support in the past. JM Financial believes this trendline support will continue to hold.

With the ratio trading at one standard deviation below its mean, the current levels suggest a potential buying opportunity, especially as the sector approaches its long-term support zone. JM Financial’s analysis points to a continued upside for PSU bank stocks in the near term.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)