Public sector banks emerged as hot picks among Dalal Street investors in 2025, with more than half of the constituents of the Nifty PSU Bank index delivering returns of over 20% as investors remain optimistic that a pickup in credit growth, recovery in margins, strengthening asset quality, contained slippages, and normalised credit costs will continue to support earnings momentum and re-rating prospects for the sector.

Sentiment has further improved amid reports that the government is considering allowing direct foreign investment of up to 49% in state-run banks, more than double the current limit, which has fuelled a sustained bull run in PSU banking stocks.

Although the Nifty PSU Bank index closed lower today, it still hit a new record high of 8,264 and is on track to extend its winning streak for the third consecutive month in November.

Notably, over the last nine months (including November), the index has logged gains in seven of them. September alone delivered an impressive monthly return of 11.41%, the strongest since December 2023. This strong performance has lifted the index’s year-to-date gains to 30%, making it the top-performing sector of 2025.

Indian Bank, Canara Bank and other banking stocks jump between 20% and 66%

Among individual stocks, seven have delivered gains between 20% and 66%, with Indian Bank leading the way as the stock continues to see sustained demand on exchanges—a trend that has remained intact since 2021.

Continuing its stellar performance, the stock has advanced another 66.50% so far this year to ₹882, marking its fifth straight year of positive gains and resulting in a cumulative return of 940%.

Canara Bank shares have also seen a massive spike in value, putting the stock on track to record its biggest yearly jump since 2022. Over the last eleven months, it has risen 48% and is likely to extend its streak to a fifth consecutive year of gains.

Rebounding from last year’s losses, Bank of India has delivered a solid return of 45% in 2025 so far and is on course to report its strongest annual performance since 2022.

State Bank of India, the largest public sector bank and the most valued among its peers, has rewarded shareholders with a 24% return, pushing the bank’s market capitalisation past ₹9 lakh crore for the first time.

Other PSU banks, such as Union Bank of India, Punjab National Bank, and Bank of Baroda, have also delivered solid returns between 20% and 27% in the current calendar year so far.

Combined profits of PSBs cross ₹49,000 crore in Q2

Public sector banks reported a record cumulative net profit of ₹49,456 crore in Q2FY26, reflecting a 9% improvement as compared to ₹45,547 crore in the same period last year.

SBI accounted for the largest share, contributing 40% to the total earnings. In percentage terms, Indian Overseas Bank reported the highest growth among public sector lenders, with profit rising 58% to ₹1,226 crore.

Only Bank of Baroda and Union Bank are two banks that reported a drop in net profit. For the first half of FY26, public sector banks together earned ₹93,674 crore, up nearly 10% from ₹85,520 crore in the same period last year, marking the first time aggregate PSB profits crossed the ₹90,000 crore mark.

Outlook for 2HFY26 – Sustained Credit Growth with Margin Upside

The outlook remains constructive, with banks guiding for continued credit momentum led by retail secured, MSME and corporate demand. Full-year loan growth is projected at 13%, while credit costs are expected to remain stable, according to domestic brokerage firm JM Financial.

Margin recovery—driven by cost-of-funds (CoF) normalisation due to ongoing deposit repricing and CRR cuts—is expected to be the key profit driver in 2HFY26.

Loan growth remained strong in Q2FY26, with credit expanding 11% YoY (vs. 10% in Q1). Growth was led by the MSME, agriculture and corporate segments, while retail growth moderated due to slower disbursements in the unsecured and vehicle loan categories.

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