Nifty PSU Bank: The public sector bank stocks are on a roll, driving the Nifty PSU Bank index to a fresh lifetime high of 8,665.70 on Wednesday, November 26.
The index rallied another 2% today, taking its one-year return to 25% — a sharp outperformance against Nifty 50’s 8% rise in the same period. All index constituents traded in the green, with Union Bank, Indian Bank and Indian Overseas Bank emerging as top performers.
The PSU bank stocks have seen an up to 60% surge in a year, with Indian Bank emerging as the leader. The stock has surged 59% in a year, followed by Canara Bank, up 48% during this period. Industry leader and India’s largest lender, State Bank of India (SBI), has also contributed to the rally with an 18% rise. SBI shares are currently hovering close to the ₹1,000 mark.
PSU Bank index surges 8x from Covid lows
While Nifty PSU Bank index’s one-year returns seem impressive, a broader context shows that the index has emerged as a wealth multiplier in the past five years, surging eight times or 703% from Covid-19 lows of 1078. Analysts have highlighted one major factor behind the keen investor interest: improving fundamentals.
Harshal Dasani, Business Head at INVAsset PSM, said that gross NPAs for PSU banks have fallen from over 14% in FY18 to around 4% now, while net NPAs have dropped below 1% for the first time in decades. Credit growth, which hovered at 5–6% pre-COVID, is now consistently printing in double digits, led by retail and SME segments. Provision coverage ratios have improved, capital buffers have expanded after multiple rounds of recapitalisation, and ageing corporate NPAs have finally been resolved or written back. As a result, ROEs for several large PSU banks are now in the 14–16% range, levels once thought structurally unachievable for the sector, Dasani said.
The EPS of Nifty PSU Bank have surged manifold, more than 30 times and thus the surge in the Nifty PSU Bank Index of around 8 times is not surprising, as per analysts.
Additionally, Vaqarjaved Khan, CFA, Sr. Fundamental Analyst, Angel One, highlighted that valuations have remained attractive for these banks as they traded at lower multiples when compared to their private counterparts. There has been a strong case of credit rebound for all sections along with strong policy reforms, which have acted as tailwinds for the sectors, said Khan.
Even after such a sharp rally, the Nifty PSU bank index trades at a P/E of 8.8 as against the Nifty Private Bank index’s P/E of 20.2.
For companies growing at double-digit growth rate and mid-teens RoEs, the current PE of around 9 for the Nifty PSU Bank index is showing that Mr. Market is giving away these companies at significant discounts to their intrinsic values, probably around a 50% discount, said Vikas Gupta, CEO & Chief Investment Strategist, OmniScience Capital. “No wonder savvy investors are getting attracted to these. We ourselves are overweight in companies in this segment.”
Time to be selective in PSU banks?
Gupta added that he sees growth rates moving to mid-teens over the next 3-5 years. Thus, the earnings should grow faster and the PEs should re-rate once the growth is reported on the financial statements in a sustained manner, he added.
However, the rally in PSU banks might turn selective, said Dasani. He said there is a case for a sustained rally, but not in the blanket, one-directional way the last three years played out.
“Crucially, many PSU banks are now generating return ratios—ROA near 1% and ROE in the mid-teens—that were once considered unsustainable for the sector. These are not one-off prints; they reflect genuine structural repair. However, the next leg will be more nuanced,” he added.
In the upcoming quarters, one earnings front, Axis Securities said that larger banks could outpace PSU banks in terms of margin improvement, with Kotak set to benefit the most (~25+ bps improvement over FY27-28E). SBI remains its top pick in the sector.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
