PSU Bank index leaps 30% in 2025; will private banks catch up in 2026?

Nifty PSU Bank index leads gains in 2025 as public sector lenders post strong loan growth, stable profitability and valuation comfort. Analysts expect the rally to continue into 2026

PSU bank stocks rising: Stocks of public sector banks (PSBs) have become one of the best money spinners for investors in 2025. The Nifty PSU Bank index has delivered 11.2 per cent returns in the last one month, even as other sectoral indices have returned in the range of (-) 1.6 per cent to 4 per cent, ACE Equity data shows.

 

By comparison, the benchmark Nifty50 index added 1.2 per cent during the period.

 

Notably, this is the third straight year of the Nifty PSU Bank's outperformance over the Nifty Private Bank index, and G Chokkalingam, founder and head of research at Equinomics Research, expects the PSU bank index to steal a march in 2026 as well.

 

The rally in PSU banks, he added, will pause only if there is a reversal in the rate cut cycle or if inflation shoots up, both of which seem unlikely in the near-term. Bank of India, Bank of Maharashtra, and Central Bank of India remains his preferred PSB picks. 

 

PSU bank stocks: More upside left?

 

Analysts believe the rally in PSU banks has more steam left given the changes in their financial health are structural rather than cyclical.

 

"Public sector banks are now delivering a sustainable return on assets (RoA) of around 1 per cent, supported by record-high profitability, sharply improved asset quality, strong capital buffers, and healthier operating metrics," noted Anil Rego, founder and fund manager at Right Horizons PMS.

 

At the fundamental level, major state-owned banks reported double-digit loan growth on a year-on-year (Y-o-Y) basis during the September 2025 quarter (Q2FY26).

 

Bank of India (BoI), for instance, clocked a credit growth of 15.9 per cent, while Canara Bank logged the same at 14.8 per cent.  State Bank of India (SBI), and Bank of Baroda (BoB), meanwhile, saw credit growth of 13.1 per cent and 12.2 per cent, respectively. The deposit base for these banks rose in the range of 9.3 per cent to 13.4 per cent Y-o-Y.

 

By comparison, while large private banks, including HDFC Bank, ICICI Bank, and Axis Bank, reported double digit loan book growth of up to 12 per cent, they underperformed their PSU peers.  Analysts believe if the government approves further consolidation of PSU banks, they would become formidable giants at a time when private players are already facing intensified competiton from other fintech players, payment banks, and small finance banks.    

 

Supportive valuations

Most large PSBs, as per Rego of Right Horizons PMS, continue to trade at 0.8–1.0x forward price-to-book (P/B), which is still reasonable given the strengthened balance sheets, return on asset (RoA) stabilising at around 1–1.1 per cent, and return on equity (RoE) sustaining at 16-18 per cent.

 

This, he said, are comparable to private-sector banks, but are available at a meaningful valuation discount. 

Investment strategy

 

As a strategy, long-term investors, looking to enter PSU bank stocks, could wait for dips to take exposure, analysts noted.

 

"Though the underlying profitability cycle remains intact, it may not be an aggressive entry point for short-term investors as there may be some near-term NIM pressure and moderation in treasury gains. Investors with a 12-24-month view, however, can still consider adding on dips, as valuations leave room for further gradual re-rating," Rego said.

 

Those at InCred Equities, however, prefer private banks over PSBs from a long-term perspective. PSU banks, they believe, will struggle to maintain their profitability over the next few years owing to lower treasury gains as the repo rate-cut cycle appears to be bottoming out.

  They prefer Axis Bank, HDFC Bank, and ICICI Bank over SBI and expect margin improvement in PSBs to be capped owing to shallow MCLR cuts, relatively faster attrition in investment yields, and margin-dilutive incremental spreads

 

"Healthy volume growth delivery, coupled with relatively better margin progression will aid outperformance for large private banks. Core profitability is at the cusp of a recovery and operating leverage could drive better core operating performance over the next 2-3 years," they said in a note.