PSU banks have been the dark horses of 2025, with the Nifty PSU Bank index delivering 55% returns. Yet valuations remain at a significant discount to private peers. We believe the re-rating story has just begun.
What's Changed?
- Asset quality transformation: GNPAs down from 14% (2018) to 4% (2025)
- Credit growth accelerating: 15%+ growth vs. 5% in previous years
- Technology investments: Digital transformation closing gap with private banks
- Capital position: Most PSU banks well-capitalized with CET1 above 12%
- ROA improvement: From 0.3% to 1%+ for leading PSU banks
Valuation Gap
Despite these improvements, PSU banks trade at 1.0-1.3x book value, compared to 2.5-3.0x for private banks. The historical discount of 60-70% has narrowed but remains substantial. We see room for further re-rating as earnings delivery continues.
Top Picks
- SBI: The bellwether with 18% loan market share and improving subsidiary value
- Bank of Baroda: Best-in-class digital initiatives and strong Africa franchise
- Canara Bank: Attractive valuations with turnaround in credit costs
- Indian Bank: South India focus with strong CASA and lower NPAs
Risks to Monitor
PSU bank investing isn't without risks. Government ownership can lead to policy-directed lending. Wage revision impacts are due. Competition from private banks and fintechs remains intense. Stick with the leaders who have demonstrated execution capability.
Investment Strategy
We recommend a basket approach to PSU bank investing given stock-specific risks. Allocate 8-10% of equity portfolio to top 3-4 PSU banks. Use corrections as buying opportunities—these stocks can be volatile but the trend is your friend.