Nifty PSU Bank index soars 5% this week, biggest gain in 4 months; UCO Bank leads

Public sector lenders such as SBI, Bank of Baroda, and Punjab National Bank rallied sharply this week, propelling the Nifty PSU Bank index to the top of sectoral charts.

All 12 constituents of the Nifty PSU Bank index ended the week in the green, led by UCO Bank with a 7.11% gain to ₹31.05. Bank of Baroda, Canara Bank, Bank of Maharashtra, PNB, Central Bank, and Union Bank followed with gains ranging between 5% and 6.15%.

SBI climbed 5% to ₹862, moving closer to its one-year high of ₹875.50. Strong gains across individual counters lifted the Nifty PSU Bank index by 4.83%, its best weekly performance in four months, taking September’s advance to 9.5%.

If the momentum sustains and the index ends the month with gains above 11%, it would mark the sharpest monthly rally since December 2023.

Loan demand hopes and fiscal confidence drive PSU banks higher

Sentiment toward banking stocks improved after the government announced GST rate cuts, which are expected to drive consumption in the economy and, in turn, revive loan demand in the system that has remained subdued in recent quarters.

Alongside this, the lagged benefits of earlier income tax cuts are likely to support loan recovery from the second half of FY26. While banks faced NIM compression in the first quarter, analysts expect margins to bottom out by the end of the September quarter, with policy easing benefits kicking in from the third quarter onward.

Meanwhile, rising bond prices also supported the rally after earlier concerns that GST rate cuts could strain government coffers eased, with the government reiterating its fiscal deficit target of 4.4% of GDP for the current year.

Higher treasury income during the June quarter helped state-owned banks report decent numbers, despite being impacted by rising costs due to their quicker loan repricing cycle.

Japanese brokerage firm Nomura expects growth in the unsecured retail segment, which is 10% of system credit, to pick up, led by gradually improving asset quality.

Further, the brokerage notes that the medium-term credit growth outlook appears favorable supported by a confluence of enabling factors, including RBI's repo rate and CRR reductions, improving liquidity dynamics, and direct and indirect tax relief measures. It expects system credit to improve to 12% YoY by FY26F.

Echoing a similar view domestic brokerage firm Motilal Oswal also projects credit growth of 11% for FY26, with further acceleration to 13% in FY27E. "Additionally, management commentary is turning constructive. This, coupled with a demand uptick led by the GST rate cut and potential resolution on tariffs (as negotiations have resumed), is expected to boost investor sentiment," said the brokerage.

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