Foreign institutional investors have significantly reduced their holdings in India's top private banks over the past year while simultaneously increasing stakes in select public sector lenders. According to The Economic Times analysis, HDFC Bank's FII ownership has shrunk more than 6 percentage points to 36.26%, while Kotak Mahindra Bank's overseas fund ownership has fallen 5.48 percentage points by the end of June. The trend extends to other major private banks, with ICICI Bank's FII equity down 4.21 percentage points, Axis Bank 2.45 percentage points, and IndusInd Bank 4.31 percentage points. By contrast, Bank of Maharashtra's stake has climbed 4 percentage points, with Bank of India and Bank of Baroda gaining 3.34 percentage points and 2.06 percentage points respectively. As noted by The Economic Times, FII holding in PSU banks is largely low, compared with their overall exposure to toptier private banks, with the 12.68% stake in Canara Bank being the largest for this category of lenders. By contrast, they collectively own nearly 40% in Axis Bank, in which FII ownership is the largest among private lenders.
Analysts attribute this shift to the diminishing performance premiums between public and private sector banks. As reported by The Economic Times, Siddharth Rajpurohit from Systematix Shares and Stocks noted that "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and loan growth there is not much to choose between both these groups which means the thesis of PSU underperformance is no longer valid." Yuvraj Choudhary from Anand Rathi Securities confirmed that PSU banks have outpaced their private sector counterparts in return on equity (RoE) for the last eight quarters, with aggregate PSU RoE at 15% higher than the aggregate private bank RoE of 12%. The Nifty PSU Bank index has risen 14.42% since July 1, 2024, significantly outperforming the private bank index's 4.51% growth during the same period. PSU banks have outpaced their private sector counterparts for the last eight quarters and on course for the ninth one, as noted by The Economic Times.
The shift has translated into substantial gains for PSU bank share prices, which have climbed for the past two years. According to The Economic Times, Indian Bank leads with a 53% rise in shares, followed by Bank of Maharashtra with a 26% gain and Union Bank of India with 26% growth. Anmol Das from Swyon Advisors explained that PSU bank profitability has improved as they have come out of asset quality issues and regulatory restrictions, while corporate growth slowdown has reduced bulky defaults and the shift toward retail banking means higher yields. Despite PSU banks' improved performance, FII holdings in PSU banks remain relatively low at 12.68% in Canara Bank, compared to their nearly 40% collective ownership in Axis Bank. As reported by The Economic Times, the premium that private sector banks enjoyed has diminished as public sector banks have caught up on a lot of parameters, with 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.
The investment shift reflects a fundamental change in the banking sector dynamics. As reported by The Economic Times, Vanishing Premiums in asset quality, underwriting, and loan growth have blurred the lines between PSU and private banks, forcing investors to focus on individual bank performance rather than sector affiliation. Large private banks are enjoying lower spreads on retail loans due to increased competition, while corporate governance issues at some large private sector banks have coincided with PSU banks' improved performance. This convergence of factors has made PSU banks increasingly attractive to foreign institutional investors seeking better risk-adjusted returns in the banking sector. The government's assertion that they will have to manage their own capital has also helped in a way, according to The Economic Times. PSU banks have gained market share, improved asset quality and that is reflected in their book value, as noted by analysts, with corporate growth also slowed; so there are no bulky defaults and the shift toward retail also means higher yields.
