The Nifty PSU Bank Index has made a remarkable comeback. The index hit its 52-week low of 5,530.35 on March 3, 2025, but has since surged 55%. Furthermore, it reached a record high of 8,665.70 on November 26, 2025. This means that public sector bank stocks have provided investors with ample opportunity in recent months.

Why are public sector banks outperforming private banks?

Data for the second quarter (July-September) of the financial year 2025-26 shows that the net profit of public sector banks (PSBs) increased by 4.7% year-on-year. Surprisingly, the profits of private sector banks (PVBs) declined by 2.1% during the same period. According to a recent report by CareAge Ratings, this improved performance was primarily driven by fee income, treasury gains, credit growth in the retail and MSME segments, and the return of operating expenses to normal levels.

In addition, PSBs have also benefited from income tax refunds. A major reason is that the credit-to-deposit (CD) ratio of public sector banks is significantly better than that of private banks. This ratio for PSBs is around 78%, while that of PVBs is around 90%. This means that public sector banks have more capital available for lending. Furthermore, these banks have seen improvement in asset quality, which has further strengthened this growth.

Overall Health of the Banking Sector

The return on assets (RoA) of all scheduled commercial banks (SCBs) stood at 1.29% in Q2FY26, although it is 11 bps lower than the same period last year. This is attributed to pressure on margins due to interest rate cuts. However, RoA has seen a slight improvement compared to the previous quarter, thanks to the improved performance of PSBs.

Going forward, bank profitability is expected to improve further due to festive season demand, credit growth, the benefit of the reduction in CRR (cash reserve ratio), and the expected stability in the unsecured and MFI loan segments.

What do experts say?

According to Saurabh Bhalerao, Associate Director at CareAge Ratings, “PSBs continue to outperform PVBs. This is due to factors such as a lower base effect and better CD ratios, which gives them greater scope for lending. Although asset quality pressures in microfinance and small-ticket loan portfolios remained greater for private banks, they are now showing signs of stabilization. The capital position of the entire banking system remains strong. Most banks maintain buffers well above regulatory requirements, driven by bond issues, QIPs by larger PSBs, and capital raising plans for the remainder of this fiscal year.”

People Also Ask:

1. What is the Nifty PSU Bank Index?
It is a Nifty index that tracks the performance of major public sector banks (PSU Banks) listed on the stock exchange. It includes banks like SBI, Bank of Baroda, and PNB.

2. Why is the performance of public sector banks improving?
The main reasons for this are: increased fee income and treasury gains, increased lending to retail and small businesses (MSMEs), improved lending capacity due to better CD ratios, and improved asset quality (NPAs, etc.).

3. Can PSU bank shares continue to deliver good returns?
Experts believe that the upcoming festive season, credit growth, and strong capital position may contribute to these banks’ continued profitability. However, consult your financial advisor before investing.

4. Which is better between PSU banks and private banks right now?
Recent quarterly results show that PSBs’ profits have grown faster than private banks. However, this long-term performance depends on several factors, including economic conditions, interest rates, and loan quality.