Structural gains, valuation support positive for PSU bank stocks

Public-sector banks (PSBs) are attracting the attention of investors and the PSU Bank Index has gained nearly 10 percent inthe past month.

- DEVANGSHU DATTA

PSBs have seen return onassets (RoA) climbing to 1percentin 20242025 (FY25) and margins are believed to have moved up further in the first half of this financial year (H1FY26) with asset quality remaining stable.

InFY25, PSB sector profitability crossed %1.5 trillion and PSBs outpaced private banks in credit expansion. The aggregate earnings per share or EPS for PSBs is expected to grow at mid-teens annually between FY26-28. There may be near-term net interest margin or NIM pressure but rising fee income, moderation in cost ratios, and healthy coverage (provision coverage ratio or PCR at 79 per cent) will keep RoA stable at 1.0 percent orabove.

Part of the upsurgeis driven by strong deposit franchises, conservative credit-deposit ratios, and traction in retail, agri and MSME segments. Even though PSBs have seen market cap rising by over 4x since FY20, valuations look reasonable with return on equity or ROE at 18-19 per cent and RoA at 1 percent. Further re-rating could be seen if the trends continue.