PSU bank stocks rally on cheap valuation, Q4 boost; will the momentum last?

Despite lagging behind in calendar year 2024 — with the Nifty Private Bank Index slipping 0.3 per cent, while the Nifty PSU Bank Index surged 13.61 per cent — private sector banks have outpaced their public sector counterparts so far in 2025 (as of June 3).

 

The Nifty Private Bank Index has delivered a gain of 10.35 per cent in CY25, outperforming the Nifty PSU Bank Index which rose 8.30 per cent in the same period. By comparison, the Nifty50 gained 3.79 per cent during the same period.

 

Individually, Kotak Mahindra Bank gained 14.7 per cent, ICICI Bank zoomed 11.6 per cent, Axis Bank climbed 10 per cent, and HDFC Bank rose 9.3 per cent during the same period, Bloomberg data showed.

 

Analysts attribute this outperformance to consistent credit growth, strong asset quality, and superior digital infrastructure.

 

“Private banks have delivered consistent performance over the past four years, and that strength is now being reflected in their outperformance this year,” said Deepak Jasani, a stock market veteran.

 

However, the tables have turned in recent months. Despite private banks performing strongly in 2025 so far, the last three months have seen a sharp reversal, with PSU banks taking the lead.

 

From March 3, 2025 to June 3, 2025, the Nifty PSU Bank Index jumped 26.54 per cent, compared to 14.69 per cent for the Nifty Private Bank Index. The sharp rally in PSU banks is backed by strong Q4 earnings, attractive valuations, and improved asset quality.

 

During this period, PSU banks like Canara Bank, Union Bank of India, Bank of Baroda and Bank of India, Indian Bank and Punjab National Bank zoomed 43.2 per cent, 35.8 per cent, 29.8 per cent, 30.3 per cent, 25.7 per cent and 26 per cent, respectively.

 

G Chokkalingam, founder and head of research at Equinomics Research highlighted that “most PSU banks have now brought down their NPAs to around 1 per cent,” and are benefitting from their vast branch network aiding CASA stability.

 

Q4FY25 snapshot: Private vs PSU banks

 

In Q4FY25, PSU banks decisively outperformed their private peers across most key financial parameters. Net profit for PSU banks rose 8.8 per cent Q-o-Q, while private banks saw a 1.1 per cent decline. Net interest income (NII) rose 1.9 per cent for PSU banks but slipped 0.7 per cent for private lenders.

 

PSU banks also recorded a 57.8 per cent jump in other income, compared to 6.4 per cent growth for private banks.

 

Operating profit for PSU banks grew 16.4 per cent, while private banks saw a 1.3 per cent decline.

 

Asset quality also improved more for PSU banks—net NPAs declined over 9 per cent, bringing them closer to private peers. Gross NPAs of PSU banks dropped 6.2 per cent, while private banks saw a 4.1 per cent drop.

 

Analysts point to improving fundamentals and relative undervaluation as the primary catalysts for the PSU bank rally. “Valuation-wise, PSU banks were trading at 1-1.2x price-to-book, whereas private banks (2-3x price-to-book) had become relatively overvalued,” said Chokkalingam.

 

Supportive policy initiatives, strategic recoveries, and higher provisioning have also boosted investor confidence.

 

Meanwhile, SBI Capital Markets note highlighted that PSU banks outpaced private banks in credit growth for the first time in 15 years, aided by lower credit-deposit ratios and direct government backing. Meanwhile, slower credit offtake by large private lenders like HDFC Bank and Axis Bank has weighed on their performance.

 

Outlook and investment strategy

 

According to Ravi Singh, SVP of research at Religare Broking, “Investors should be cautious with banks for now and have a balanced approach.” He advises holding high-quality private banks like HDFC and ICICI Bank in one’s portfolio.

 

“Additionally, they can start adding in PSU Banks at lower levels as they are likely to continue their uptrend in coming quarters,” he said, while cautioning against impulsive decisions in high-valuation stocks.

 

“Prefer banks with strong digital presence, ROA > 1 per cent, and stable NIMs in a falling rate scenario,” Singh bank, banks added.

 

He further noted that “investors should aim for high quality and market leaders for now as there are valuation concerns over specific stocks.” 

 

A focus on banks with improving CASA ratios, strong retail loan books, and stable asset quality is recommended. While HDFC Bank and ICICI Bank are stocks to hold, “Canara Bank, SBI Bank can be accumulated at better valuations,” he said.

 

Meanwhile, Chokkalingam said that over the past two decades, private banks have generally outperformed public sector banks, in-line with long term trends, largely due to stronger credit growth and better asset quality. 

 

“However, from a valuation perspective, I would prefer PSU banks as they are relatively fairly valued and cheaper,” he added.