Motilal Oswal sees re-rating potential for PSU banks; SBI, PNB top bets

Despite a nearly 5x jump in aggregate mcap since FY20, most coverage PSBs still trade at reasonable valuations of 0.8-1x forward P/B & 5-7x FY27E EPS, leaving room for further upside.

Public sector banks (PSBs) in India have shed their old image as laggards and are now being seen through a markedly different lens, analysts said.

 

“PSBs have seen a strong re-rating over the past five years, shedding their legacy image of lenders with poorer underwriting capabilities to competitive players delivering consistent value to stakeholders,” Nitin Aggarwal, Dixit Sankharva and Disha Singhal of Motilal Oswal said, in a note dated September 24, 2025.

 

Despite a nearly fivefold (5x) jump in aggregate market capitalisation since FY20, most coverage PSBs still trade at reasonable valuations of 0.8-1x forward price-to-book (P/B) and 5-7x FY27E earnings per share (EPS), leaving room for further upside.

 

 

Given this, analysts at Motilal Oswal identified State Bank of India (SBI) and Punjab National Bank (PNB) as their top picks among large PSBs, while Indian Bank stood out among mid-sized peers. The bullish stance comes amid structural improvements in profitability, asset quality, and capital strength, which the brokerage believes will sustain returns in the coming years.

Profitability and credit growth on track

 

At the centre of this optimism is the transformation in PSB profitability. Sector return on assets (RoA) has crossed 1 per cent, to ~1.1 per cent in FY25, while aggregate PSB profits surged to a record ₹1.5 trillion, contributing nearly 48 per cent of total banking sector profits. “Once considered aspirational, PSBs have achieved a structural turnaround, supported by improved underwriting, cost control, and robust recoveries,” the brokerage noted. Motilal Oswal expects a 14 per cent compound annual growth rate (CAGR) in aggregate earnings of coverage PSBs over FY26-28E.

 

While net interest margin (NIM) pressures remain a near-term concern, strategic rebalancing toward higher-yielding Retail, Agri, and MSME (RAM) segments, along with rising fee income, is expected to stabilise RoA at 1-1.1 per cent. Bond and treasury gains have also provided crucial support to earnings, with contributions from treasury operations reaching 22-40 per cent of total other income in Q1FY26, particularly at SBI, Bank of Baroda (BOB), and Canara Bank (CBK). Though these gains are likely to moderate as bond yields stabilise, systemic liquidity and the upcoming CRR cut could further bolster balance sheets.

 

PSBs’ robust deposit franchises, conservative credit-to-deposit ratios, and strong liquidity positions underpin stable credit growth. “PSBs still command over 62 per cent of system deposits, anchored by their extensive branch presence and strong depositor trust,” the brokerage highlighted. This advantage allows them to fund loans without aggressively chasing high-cost deposits, supporting a steady 11-12 per cent Y-o-Y credit expansion. PSBs also outpaced private banks in FY25 loan growth for the first time in 15 years, with 12 per cent growth versus 10 per cent, driven by momentum in retail and MSME segments.  ALSO READ | SBI, Canara, Indian Bank hit 52-wk highs; PSU Bank index up 1%; here's why

Asset quality, efficiency, and capital strength

 

Asset quality has also seen a solid turnaround. Gross NPA ratios have declined from 14.6 per cent in FY18 to 2.8 per cent in FY25, while net NPA ratios stand at 0.5 per cent, comparable with private peers. The provision coverage ratio (PCR) has surged to ~79 per cent, ensuring resilience against potential slippages. Slippages are expected to remain below 1 per cent through FY27-28E, highlighting the sector’s disciplined underwriting and stronger capital buffers.

 

On the efficiency front, PSBs are gradually narrowing the gap with private banks. Cost-to-income ratios, historically in the 48-55 per cent range, are expected to improve as revenue growth strengthens, fee income scales, and headcount remains largely stable. Digital adoption, branch rationalisation, and workforce optimisation further contribute to better operating leverage.

 

Capital adequacy has strengthened considerably, with CET-1 ratios for most PSBs rising to 11-15.3 per cent by 1QFY26. Several banks, including SBI, PNB, Canara Ban, and Union Bank, have tapped equity markets successfully, raising their CRAR to a healthy 15-18 per cent. Combined with robust profitability and cleaner balance sheets, this capital cushion allows PSBs to sustain credit growth while containing risks.

 

Valuation, analysts believe, remains an important factor for investors. Despite a strong return on equity (RoE) of ~18 per cent and sustainable RoA above 1 per cent, PSBs are trading at relatively inexpensive multiples, leaving potential for further market re-rating. 

 

Motilal Oswal analysts said while near-term earnings may face margin pressures, structural improvements across asset quality, capital strength, and operational efficiency offer strong visibility on sustained returns.

 

That said, PSBs appear fundamentally transformed, with cleaner balance sheets, disciplined growth, and improving efficiency. SBI and PNB are the preferred large-cap picks, while Indian Bank leads among mid-sized banks. The brokerage maintains a neutral stance on Bank of Baroda and Union Bank of India, citing scope for steady but gradual earnings growth.

 

“PSBs are well positioned to benefit from any capex recovery, though near-term growth will continue to be funded by RAM assets,” Motilal Oswal analysts said, underlining a positive medium-term outlook for the sector.