FIIs Reduce Stakes in PSU Banks Amid Valuation Concerns and Sectoral Rotation

In the first quarter of FY26, Foreign Institutional Investors (FIIs) pare down their holdings in public sector undertaking (PSU) banks, driven by valuation concerns and global risk-off sentiment. Key takeaways from the latest developments include a reduction in FPI stakes in PSU banks from 4.60% in Q4FY25 to 4.44% in Q1FY26. Bank of Baroda, State Bank of India, and Punjab & Sind Bank observed notable reductions, while Union Bank and Canara Bank garnered foreign interest. Private banks saw higher FPI inflows, led by South Indian Bank, IndusInd Bank, RBL Bank, Karnataka Bank, and CSB Bank. Retai and DII trends reveal mixed sentiment and cautious repositioning, with DII holdings in PSBs remaining flat at 11.97%. Retail investors reduced exposure in 23 of the 32 banks, most notably in private sector banks like RBL, South Indian Bank, and IDFC First Bank.

Key Takeaways:

• FIIs reduced their stakes in PSU banks during Q1FY26, signalling near-term caution after a robust FY25 rally.
• The average FPI investment in PSU banks eased from 4.60% in Q4FY25 to 4.44% in Q1FY26, with notable reductions in Bank of Baroda (-0.90%), State Bank of India (-0.61%), and Punjab & Sind Bank (-0.48%).
• Union Bank of India (+0.59%) and Canara Bank (+0.83%) bucked the trend and gained foreign interest.
• Private banks saw higher FPI inflows, led by South Indian Bank (+5.62%), IndusInd Bank (+3.97%), RBL Bank (+3.13%), Karnataka Bank (+2.78%), and CSB Bank (+2.30%).
• On the DII front, sentiment remained mixed, with DIIs adding weight to counters like SBI, Bank of Baroda, PNB, and Indian Bank, but booking profits or reducing exposure in some private sector picks.
• Retail investors reduced exposure in 23 of the 32 banks, most notably in private sector banks like RBL (-6.42%), South Indian Bank (-5.3%), and IDFC First Bank (-1.38%).

Statistics:

• 23 out of 32 banks saw a reduction in stakes from retail investors.
• FPI inflows in private banks rose from 19.77% to 20.63%.
• FIIs reduced their stakes in PSU banks by 0.16 percentage points (from 4.60% to 4.44%).
• Union Bank of India and Canara Bank gained foreign interest, increasing by 0.59% and 0.83%, respectively.
• RBL Bank saw a reduction of 6.42% in stakes from retail investors.
• South Indian Bank witnessed a decline of 5.3% in stakes from retail investors.

Sources:

• Sunny Agrawal, Head of Fundamental Research at SBI Securities
• IE Online Media Services Pvt. Ltd.
• Contify.com