- PSU bank index up >5% this week, on track for a 7% monthly gain.
- Credit growth in PSUs outpaces private banks, driven by MSME and retail loans.
- Asset quality improves: SBI GNPA fell to 1.6% in Q4.
- Analyst projects 11.3% CAGR in earnings for FY26‑28.
- Top picks: SBI (target ₹1,300) and Indian Bank (target ₹1,025).
Most investors missed the credit‑growth surge in PSU banks – and that cost them upside.
Why the Nifty PSU Bank Index Surge Beats Private Sector Trends
The Nifty PSU Bank Index jumped more than 1% in intraday trade on Friday and has already added over 5% this week. On a monthly basis the index is up 7%, marking six consecutive months of gains and a cumulative 40% rise in the last half‑year. By contrast, the private‑sector bank index has struggled to keep pace, reflecting slower loan‑book expansion and higher cost pressure.
Credit Growth vs. Asset Quality: The PSU Edge Explained
Fundamental research highlights that advances in PSU banks grew at a robust 10‑11% annualised rate, while private banks lingered around 5‑6%. The bulk of this excess growth originates from micro‑, small‑ and medium‑enterprise (MSME) financing and retail credit, segments where government policy continues to favor state‑run lenders.
Asset quality, a critical metric for bank health, is also improving. State Bank of India (SBI) reduced its gross non‑performing assets (GNPA) to 1.6% in the December quarter, down from 1.73% three months earlier, and the absolute amount of bad loans fell as well. Similar trends are evident across the PSU universe, driven by tighter underwriting standards and stronger credit discipline in priority‑sector lending.
SBI vs. Indian Bank: Head‑to‑Head Fundamentals
SBI (Target ₹1,300) posted a well‑rounded earnings beat, with net interest margin (NIM) projected to stay above 3% in FY26 and beyond. Fee‑based income lifted profit‑after‑tax (PAT), while the cost‑to‑income (C/I) ratio steadied near 50%. Credit growth surged 15.6% YoY, and management lifted its FY26 growth guidance to 13‑15%.
Analyst expectations have been nudged upward: earnings estimates rise 3% for FY27 and 4.3% for FY28, with return on assets (RoA) and return on equity (RoE) projected at 1.1% and 15.9% respectively for FY27.
Indian Bank (Target ₹1,025) delivered an in‑line quarter, maintaining steady margins despite a modest 1.8% QoQ deposit rise. NIM improved sequentially, and the credit‑deposit (C/D) ratio climbed to a comfortable 79%.
Asset‑quality metrics are best‑in‑class: coverage ratios are strong, and slippages are low. Earnings forecasts have been raised 4% for FY27 and 4.5% for FY28, with RoA and RoE expected at 1.4% and 17.8% for FY27.
Sector Momentum: What This Means for Your Portfolio
Three broader forces reinforce the upside thesis for PSU banks:
- Policy Tailwinds: Government initiatives to boost credit to MSMEs and the priority sector channel new loan growth toward PSUs.
- Margin Resilience: Steady NIM expectations (3%+ for SBI) suggest earnings can withstand modest interest‑rate volatility.
- Improving Credit Costs: Lower GNPA and higher provisioning coverage reduce expected credit‑cost drag, supporting earnings expansion.
Historically, PSU banks have delivered multi‑year outperformance after each policy‑driven credit push. A similar rally in 2019‑20 saw the index climb over 30% in eight months, followed by a period of earnings acceleration that outpaced the private sector.
Investor Playbook: Bull and Bear Scenarios
Bull Case
- Credit growth sustains >12% YoY through FY27, feeding higher interest income.
- Asset quality continues to improve, keeping GNPA under 1.5% and provisioning costs low.
- NIM stays above 3% for SBI and around 2.8% for Indian Bank, driving margin expansion.
- Share price appreciation aligns with earnings CAGR of 11.3% (FY26‑28), delivering total returns above 20% annually.
Bear Case
- Unexpected slowdown in MSME demand or tighter monetary policy compresses loan growth.
- Rising GNPA due to macro‑stress could erode profitability and force higher provisions.
- Margin pressure from a steepening funding curve reduces NIM, especially for banks with higher deposit‑cost sensitivity.
- Regulatory changes to priority‑sector targets could shift new credit to private lenders.
Investors should monitor GNPA trends, NIM trajectories, and policy announcements on priority‑sector credit. Position sizing can be calibrated: overweight SBI for growth bias, while using Indian Bank as a defensive play with its solid coverage ratios.
In summary, the PSU banking rally is not a fleeting technical bounce; it is anchored in fundamental credit‑growth advantages, improving asset quality, and favorable policy dynamics. Aligning your portfolio with the sector’s upside while keeping a watchful eye on the downside risks can add meaningful alpha in the coming fiscal years.