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PSU Banks – Room for upside amid structural improvement and fundamental business strength

ICICIdirect Research 31 Oct 2025 DISCLAIMER

Public Sector Banks (PSBs) have witnessed a notable rally in recent months, supported by revival in fundamentals and a stronger operating profile. Despite the sharp up-move, valuations remain reasonable, and we believe there is still further room for upside as structural improvement continue to play out.
A key driver of this transformation has been the increasing granularity in the loan mix. The share of retail, agriculture and MSME (RAM) portfolio has been steadily rising — SBI’s RAM book increased to 67% in Jun-25 from 49% in Mar-18, while Bank of Baroda’s rose to 62.7% from 52% during the same period. This shift towards granular lending has meaningfully reduced dependence on large corporates, limiting the drag from isolated slippages and enhancing earnings stability.
Asset quality has strengthened materially, with GNPA ratio of PSBs improving from 14.6% in FY18 which improved to 5.1% in FY23 and further to 2.6% in FY25. As of Mar-25, gross NPAs of PSBs declined by 17% YoY to ₹2.94 lakh crore, underscoring disciplined underwriting and sustained recoveries. On the liabilities side, PSU banks continue to maintain a strong and stable deposit base, with CASA ratios around 30–40%, providing a comfortable funding cushion.
A potential government move to raise the FII limit in PSBs from 20% to 49% could act as a further sentimental boost. Further consolidation among PSU banks, to scale up lenders and streamline overlapping operations, could strengthen balance sheet inducing passive flows, thereby aiding valuations. Thus, with improving asset quality, increasing granularity, robust liabilities profiles, and fair valuations, PSU banks are well-positioned to deliver the next leg of growth in India’s banking landscape. Among the pack, we prefer State Bank of India, Bank of Baroda and Canara Bank

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