State-owned banks dominated equity markets in 2025, outperforming their private-sector peers on the back of stronger asset quality, rising profitability and steady growth in net interest income.
Data compiled by Moneycontrol shows PSU bank stocks rallied 8–32 percent during the year, outstripping the 2–23 percent gains clocked by private-sector lenders.
Indian Bank emerged as the star performer, soaring 34 percent to Rs 809.20 from Rs 530.95 at the start of the year. Canara Bank followed closely with a 33 percent rise, while Union Bank of India and State Bank of India posted gains of 21 percent and 18 percent, respectively.
Among private banks, Federal Bank led with a 23 percent return, trailed by IDFC First Bank at 22 percent and Kotak Mahindra Bank at 17 percent, respectively, but still behind the momentum seen in public-sector names.
FDI Clarification Caps PSU Bank Rally
Having said that, the sharp rally in PSU bank stocks earlier this year cooled off after the government clarified it had no plans to raise the foreign direct investment (FDI) limit in state-run banks from 20 percent to 49 percent.
Minister of State for Finance Pankaj Chaudhary told the Rajya Sabha there was no proposal to hike the cap, countering earlier media reports.
In October, Reuters had reported that the government was considering allowing up to 49 percent direct foreign investment in state-run lenders, more than double the current ceiling.
Further, Moneycontrol on December 1 reported that government is working on an ambitious public-sector bank (PSB) consolidation blueprint that could reduce the number of state-owned lenders from 12 to just four in FY27 — with State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB) and a merged Canara–Union Bank structure emerging as the likely four.
How financials of peers performed in 2025?
Most public-sector lenders outperformed private peers with comparable asset bases in FY2025.
SBI, the country’s largest PSU bank, reported a net profit of Rs 20,159.67 crore in Q2FY26, up from Rs 18,331.44 crore in Q2FY25. In comparison, HDFC Bank, the largest private lender, posted a profit of Rs 18,641.28 crore in Q2FY26, up from Rs 16,820.97 crore in the Q2FY25.
Canara Bank reported a profit of Rs 4,773.96 crore in Q2FY26, comfortably ahead of its private-sector counterpart Kotak Mahindra Bank, which posted Rs 3,253.33 crore.
In terms of asset quality, PSU banks remain stronger compared to its peers. PSU banks' gross non-performing asset (NPA) ratios remained in the range of 1.72-3.45 percent in July-September quarter in the current fiscal year. On the other hand, private banks' GNPA ratio remained in the range of 0.76-5.02 percent. In terms of net NPA ratios, PSU banks’ remained in the range of 0.16-0.83 percent in Q2FY26, and private banks’ remained in the range of 0.30-1.37 percent in same quarter.
Outlook
According to Sachin Sachdeva, Vice President & Sector Head – Financial Sector Ratings at ICRA, the outlook for India’s banking sector remains stable for FY2026. Banks are not expected to face major capital-raising needs, supported by healthy credit growth across retail and MSME segments.
Both PSU and private banks are likely to maintain strong solvency and asset quality metrics. However, credit costs may inch up in H2 FY2026, especially for private-sector lenders with higher exposure to unsecured retail and MSME loans.
Net interest margin (NIM) improvement, initially expected from Q3 FY2026 as deposits reprice, may now see slight delays due to the recent rate cut. ICRA will closely monitor margin movements and the performance of unsecured loan portfolios amid evolving global macroeconomic conditions.
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