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Granularity, asset quality and policy tailwinds to drive PSB valuations

ICICIdirect Research 21 Nov 2025 DISCLAIMER

Public Sector Banks (PSBs) delivered a stronger-than-expected Q2FY26, marked by industry-aligned credit growth, better margins trend (vs private peers) and better asset quality trend. Cumulative profits surged to ₹49,456 crore, rising 9% YoY, supported by continued credit off-take, steady NIMs and lower credit cost.
Loan granularity continues to be a defining structural shift, with RAM mix steadily rising across large PSBs. SBI’s RAM share climbed to ~67% (Sep-25) from 63.8% in Mar-22, while Bank of Baroda improved to 61.7% from 52%. This deepening granularity has reduced reliance on lumpy corporate exposures, thereby improving asset quality resilience and strengthening earnings visibility.
Asset quality trends further underline the balance-sheet transformation. PSB GNPA ratios improved from 5.1% in FY23 to 2.3% in 1HFY26, with provision coverage being strong at ~80%. A strong liabilities franchise, with CASA in the 30–40% range, continues to support stable funding costs and margin resilience.
Policy tailwinds add to the positive outlook. As per media sources, government is drawing up the next phase of PSU bank consolidation, aiming to reduce the number of PSBs from 12 to 6–7 larger institutions. This phased approach is intended to improve capital alignment, operational efficiency and capacity to support India’s expanding economy. A potential increase in the FII limit from 20% to 49% could further attract foreign flows and aid valuation re-rating.
Overall, with strengthening fundamentals, improving granularity, record profitability and supportive policy momentum, PSU banks remain reasonably valued — and we see further room for upside as the structural improvements continue to play out.
Top picks – SBI, Bank of Baroda and Canara Bank, Bank of India

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