Foreign Institutional Investors (FIIs) have pared their holdings in public sector undertaking (PSU) banks during Q1FY26, signalling near-term caution after a robust FY25 rally. Data shows the average foreign portfolio investment (FPI) in PSU banks eased from 4.60% in Q4FY25 to 4.44% in Q1FY26, as investors selectively rebalanced portfolios. Notable reductions were observed in Bank of Baroda (-0.90%), State Bank of India (-0.61%), and Punjab & Sind Bank (-0.48%), suggesting selective repositioning rather than a wholesale exit.
Sunny Agrawal, Head of Fundamental Research at SBI Securities, said, “Valuation concerns and global risk-off sentiment have seen FIIs reduce their stakes in PSU banks. This appears to be profit booking after a strong FY25 rally that delivered outsized returns.” Several PSU banks had touched or surpassed historical price-to-book averages by end-FY25, prompting hesitation over stretched valuations. Additionally, concerns around subdued rural demand, setbacks in microfinance institutions (MFIs), and rising non-performing assets (NPAs) in small-ticket retail and MSME segments contributed to this shift, stated Agrawal.
Profit Booking & Valuation Stretch
Banks had benefited from a phase of low credit costs driven by strong recoveries from written-off accounts. However, this tailwind may be fading, leading to questions over the sustainability of return on assets (RoA). Margin compression is also expected in the upcoming rate cut cycle, further tempering expectations. Despite the pullback, Agrawal believes that “fundamentals like improving RoA, moderating credit costs, and better capital buffers remain intact.” He adds that FIIs could return selectively post-consolidation, particularly in PSU banks with strong RAM (Retail, Agriculture, MSME) franchises and granular liability profiles.
Interestingly, Union Bank of India (+0.59%) and Canara Bank (+0.83%) bucked the broader trend and gained foreign interest. Private banks saw stronger FPI inflows, rising from 19.77% to 20.63%, led by South Indian Bank (+5.62%), IndusInd Bank (+3.97%), RBL Bank (+3.13%), Karnataka Bank (+2.78%), and CSB (+2.30%), underscoring a sectoral rotation. While exposure to large-cap names like HDFC Bank and ICICI Bank remained intact.
Going forward, PSU banks will likely navigate moderated return expectations in the short term, with performance hinging on monsoon outcomes, credit growth trends, and global rate trajectories. While FIIs tread cautiously for now, structural drivers like formalisation, capex revival and bank consolidation keep the long-term opportunity firm, adds Agrawal.
DIIs & Retail Investors
On the domestic institutional (DII) front, sentiment remained mixed. DII holdings in PSBs remained flat at 11.97% (11.98% in Q4 FY25), with institutions adding weight to counters like SBI, Bank of Baroda, PNB, and Indian Bank. Yet, the declines in UCO Bank, Canara Bank, Central Bank, and Indian Overseas Bank suggest selective caution and divergent portfolio preferences. DIIs mirrored this selective intensity in private sector picks, notably adding 13.58% to RBL Bank. But they booked profits or reduced exposure in IndusInd Bank, CSB Bank, Karnataka Bank and Federal Bank, revealing a split approach.
Meanwhile, retail investors reduced exposure in 23 of the 32 banks, most of it witnessed in private sector banks. RBL (-6.42%), South Indian Bank (-5.3%), DCB (-3.18%), Bandhan Bank (-1.97%) and IDFC First Bank (-1.38%) were among the private sector banks that reported a reduction in stakes from retail investors.