Nomura flags 4 risks for PSU bank stocks; prefers Axis Bank, ICICI Bank

Global brokerage Nomura prefers private banks over PSU bank stocks, citing limited re-rating scope, weaker earnings quality, and high leverage risks among PSBs. It likes Axis Bank & ICICI Bank

Nomura bullish on private banks over PSU banks

  Global brokerage Nomura has turned constructive on private sector banks as it believes the sharp outperformance and re-rating of public sector undertaking (PSU) banks over the past year leave limited room for further upside.  

The risk-reward in bank stocks, the brokerage believes, is "asymmetrically" tilting in favour of private bank stocks.

  "PSU banks have seen a sharp re-rating on the back of real fundamental improvement -- but the drivers are cyclical. The segment now trades at +1 standard deviation (1.3x) of its long-term average, leaving limited room for re-rating room," Nomura said in a recent report.

 

  On the contrary, private banks have been de-rated to ~2.0x, well below -1 SD of their 10-year mean. 

  This de-rating, Nomura believes, is overdone with the risk-reward asymmetrically favouring private banks.

 

Private banks vs PSU banks: Historical trend

Over the past 12 months, PSU banks have outperformed their private peers by a wide margin, with the Nifty PSU Bank index rising 32 per cent compared to a 2 per cent decline in the Nifty Private Bank index.  

This rally, the brokerage notes, has been driven by a combination of improving asset quality, stronger profitability, and a reversal in loan market share losses in the PSB basket. 

  However, these gains have already pushed valuations to elevated levels, with PSU banks trading at about 1.3 times one-year forward price-to-book (P/B) value, a 27-per cent premium to its 10-year historical mean of 1.1x, and around +1SD above the long-term average.  In contrast, private banks have de-rated sharply and now trade near 2x P/B, well below its historical average of 2.8x. This has created a "favourable risk-reward asymmetry", as per Nomura.

  "PSU banks' discount to the overall banking sector has compressed to 23 per cent from 45 per cent in March 2025, while the premium commanded by private banks has shrunk to 17 per cent from 22 per cent over the same period. We believe the de-rating in private banks is overdone," Nomura said.

  In this backdrop, Nomura outlines four key reasons why further re-rating of PSU banks may be difficult.  CHECK Stock Market LIVE Updates 

Nomura lists four reasons PSU banks may see limited re-rating

 

Loan growth sustainability 

PSU banks, which historically lagged private banks and the industry in terms of loan growth, have seen a sharp outperformance in loan market share gain since September 2024. 

PSU banks have since recorded a loan growth CAGR of 14.4 per cent till December 2025, outpacing both the industry (12.5 per cent) and private banks (10.3 per cent).

  Resultantly, PSU banks gained ~125bp of loan market share from September 2024 to December 2025, while private banks lost ~110bp over the same period.

  This expansion, however, has not been supported by commensurate deposit growth. Instead, PSU banks relied on drawing down their statutory liquidity ratio (SLR) buffers, which have fallen from around 25 per cent in FY21–22 to around 20 per cent by the third quarter of FY26 (Q3FY26).

  Nomura warns that this funding lever is nearing exhaustion, estimating that PSBs have roughly two quarters of liquidity-supported loan growth left before facing LCR constraints.   Check - TOP GAINERS NSE | TOP LOSERs NSE 

   

Earnings quality is weaker 

Nomura noted that treasury gains and recoveries from written-off assets have contributed significantly to PSU bank profitability, accounting for 20-40 per cent of pre-provision operating profit (PPOP) over FY24-9MFY26. 

In contrast, private banks derive the bulk of their earnings from core operations. Nomura cautions that such non-core income streams are, typically, volatile and linked to interest rate cycles, making PSU bank earnings less predictable.

 

Higher leverage amplifying downside risks

PSU banks operate at leverage levels of 12-17 times, compared to 6-9 times for private banks. This implies that even a modest deterioration in credit costs or decline in treasury income can have a disproportionately large impact on return on equity (RoE). 

For instance, a 20 basis point increase in credit costs could reduce RoE by 240-340 bpsfor PSU banks -- roughly double the impact seen in private peers.  

Valuations price in best-case scenario

With PSU banks trading above historical averages, any further re-rating would require the simultaneous persistence of favourable credit costs, strong loan growth, and sustained non-core income,  which Nomura views as a "high bar." 

  In contrast, private banks are available at relatively inexpensive valuations despite stronger earnings visibility and superior asset quality. 

Bank stocks to buy in 2026: Nomura bank stock picks 

In this backdrop, Nomura said private bank stocks trade at valuations that do not reflect these structural advantages. 

  "A combination of attractive valuations and durable earnings quality makes private banks a more compelling investment proposition at this point in the cycle," it said, picking Kotak Mahindra Bank, Axis Bank and ICICI Bank as top stock picks. 

All three stocks have 'Buy' ratings with potential upside of 17.1 per cent (target: ₹445), 12.5 per cent (₹1,500), and 17.2 per cent (₹1,535), respectively.

  Nomura also has 'Buy' ratings on HDFC Bank (target: ₹940; upside: 15.2 per cent), SBI (₹1,205; upside: 13.5 per cent), and Bank of Baroda (₹320; upside: 16 per cent).

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