While banking stocks staged a comeback in August after a July slump, it was public sector banks (PSBs) that managed to attract significant investor interest, not only outperforming their private peers but also beating the benchmark indices.
The Nifty PSU Bank index, which tracks 12 PSBs, has gained 3.30% so far this month, outperforming the Nifty Private Bank index, which declined 0.40%. This performance also surpassed the Nifty 50’s 1.27% gain in August. Individually, Indian Bank shares rose 8%, while those of Bank of India and SBI, each gaining 4% in August so far.
The outperformance can be attributed to the healthy figures posted by PSBs in the June quarter, driven by expanding credit growth, mainly from higher lending in retail, agriculture, and MSME sectors, along with improving asset quality and rising treasury gains, which helped state-owned banks deliver strong performance in a quarter marked by falling net interest margins.
PSBs post stronger asset quality, lower credit costs, and record profits
Public sector banks outperformed private banks in key metrics in the June quarter, with PSBs reporting a credit rate growth of 11%, higher than the 8.1% of PVBs. The turnaround in PSBs began in FY25, when they outperformed private banks for the first time in 14 years, achieving loan growth of 13.1% YoY, outpacing PVBs’ 9% growth.
In terms of asset quality as well, PSBs reported improvements, while private banks faced a sharp rise in slippages.
Slippages at private banks grew 41% YoY to ₹36,000 crore in Q1FY26, compared with 14.4% and ₹27,000 crore for PSBs. On credit costs, PSBs saw a 4.8% YoY decline to ₹0.16 lakh crore, whereas private banks reported a sharp 172.1% increase over the same period, according to CareEdge Rating data.
The higher slippages by PVBs are due to their greater exposure to unsecured retail and microfinance segments. On the other hand, PSU banks continued to outperform on this front, owing to a more conservative lending approach and stronger performance from corporate borrowers.
Amid improving asset quality and a significant jump in treasury income, PSBs’ net profit soared to ₹44,218 crore, up 11% from ₹39,974 crore a year ago.
Among PSBs, Indian Overseas Bank saw highest YoY growth in net profit, rising 75% to ₹1,111 crore. Punjab & Sind Bank follows by reporting a growth of 48% at ₹269 crore. Bank of Baroda and Canara Bank clocked a net profit of 2% and 22%, respectively.
Bernstein flags risk as PSBs outgrow PVBs with weaker NII
Global brokerage Bernstein, in its latest note, said, “There is a real risk that PVBs face a period of prolonged slower growth, while PSBs continue to grow faster, albeit with structurally lower margins.”
However, the brokerage also cautioned that this growth comes with risks. PSBs are offering very aggressive loan pricing to capture market share, which is weighing on their net interest income (NII) growth. Even though they are expanding loans faster and improving their loan-to-deposit ratio (LDR), their NII growth still lags behind PVBs.
According to Bernstein, stronger return ratios (RoAs) for PSBs are currently being supported more by low credit costs and treasury gains rather than core operating performance.
The report also recalled that nine months ago, it had expected the loan growth gap between PVBs and PSBs to reemerge once PSBs’ excess liquidity was absorbed. That liquidity has now been fully utilized, yet PSBs’ aggressive lending stance has intensified instead of easing.
Bernstein’s base case now is that PSBs will eventually scale back their aggression as the current tailwinds to RoAs—benign credit costs and treasury gains—begin to fade. If this does not happen, PVBs could face an extended phase of slower growth, while PSBs may continue to expand at a faster pace but with structurally weaker margins.
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