Why PSU bank stocks are dominating in 2025 and what it means for long-term investors

India’s public sector banks have scripted one of the biggest turnarounds in recent market history. Once weighed down by bad loans and repeated capital infusions, PSU banks are now among the strongest-performing stocks in 2025.

The Nifty PSU Bank index has risen by over 12% in just 3 months and has outpaced private bank indices for the third consecutive year. Asset quality is at its best level in more than a decade, profitability has stabilised, and valuations remain attractive.

For investors trying to understand whether this rally is sustainable, the answer lies in data, not sentiment. Today, analysing PSU banks is much easier, as banking-specific ratios such as NPAs, NIM, CASA, and capital adequacy are available only on Finology Ticker, which focuses exclusively on stock and sector fundamentals.

The PSU banking turnaround: what really changed

Between FY15 and FY18, public sector banks were at the centre of India’s NPA crisis. Gross NPAs crossed 14% for several lenders after the RBI’s asset quality review exposed years of stressed lending.

Fast forward to FY25, and the picture looks completely different.

• Gross NPAs for PSU banks have fallen to around 2.6%, from 7.3% in FY22
• Net NPAs are now close to 0.7-0.9% for most large PSU banks
• Return on assets has improved to around 1.1%
• Return on equity is consistently in the 16-18% range
• Credit costs have dropped sharply to about 0.4%

This improvement did not happen overnight. Years of aggressive provisioning, capital infusion, stricter underwriting and tighter RBI supervision have fundamentally changed PSU bank balance sheets.

Investors can clearly see this shift by tracking historical NPA trends, CASA ratio and profitability metrics on Finology Ticker, which presents banking ratios separately instead of mixing them with general corporate ratios.

Why PSU banks are outperforming private banks

The outperformance of PSU banks is not just about recovery. It is about relative value.

PSU banks today are delivering return ratios comparable to private banks, but at significantly lower valuations.

• PSU banks control nearly 62% of India’s deposit base
• Credit growth for PSU banks is running at about 12%, versus 9% for private banks
• Dividend yields are higher than private peers
• Valuations are at a steep discount

For example, while private banks like HDFC Bank and ICICI Bank trade at 2.5x to 3.5x book value, most PSU banks trade between 0.7x and 1.0x book value.

This valuation gap has started to narrow, but it has not closed yet. That is why investors tracking banking stocks on Finology Ticker’s peer comparison section can clearly see where PSU banks stand relative to private banks on both returns and pricing.

Top PSU bank stocks to watch in 2025–26

1. State Bank of India (SBI)
SBI remains the backbone of India’s banking system. With advances of over ₹41 lakh crore and deposits exceeding ₹53 lakh crore, SBI has achieved scale without compromising asset quality.

• Gross NPA: ~1.8%
• CASA ratio: ~40%
• RoA: ~1.1%
• RoE: ~14.8%
• Valuation: ~0.9x book

SBI’s digital platform YONO has over 60 million users, handling transactions worth more than ₹7 lakh crore annually.

2. Bank of Baroda
Bank of Baroda has emerged as one of the strongest PSU turnaround stories.

• Gross NPAs reduced from 9.4% (FY20) to ~2.9%
• Provision coverage above 90%
• RoA around 1.1%
• Strong overseas presence in 17 countries

Despite these improvements, the stock trades at around 0.9x book value.

3. Canara Bank
Canara Bank stands out for operational efficiency.

• Cost-to-income ratio: ~45%
• Credit growth: ~15%
• GNPA: ~2.3%
• Retail and MSME loans form nearly 60% of the book

At around 0.7x book value, it remains one of the cheapest large PSU banks.

4. Bank of Maharashtra
Often overlooked, Bank of Maharashtra has quietly delivered strong numbers.

• Lowest GNPA among PSU banks at ~2.1%
• Credit growth of ~16%
• Strong regional presence in Maharashtra

Mid-sized PSU banks like this can be easily analysed using banking-specific filters on Finology Ticker’s screener.

The valuation advantage: why smart money is entering

The valuation argument is simple.

PSU banks are delivering 1-16% RoE while trading at 60-70% discounts to private banks. Global deals underline this gap.

Recent transactions show foreign investors paying:

• ~2.6x book for RBL Bank
• ~1.7x book for Federal Bank

When private banks command such premiums, PSU banks trading below book value become hard to ignore.

Investors can compare book value trends and fair valuations using Finology Ticker’s book value and valuation calculators, which help estimate whether a banking stock is priced reasonably based on its fundamentals.

How to evaluate PSU bank stocks

Before investing, focus on these metrics:

• Gross NPA below 3%
• Net NPA below 1%
• RoA above 1%
• ROE above 14%
• NIM above 2.5%
• CASA ratio improving
• Price-to-book compared with historical averages

Investors can screen banks on these exact parameters in seconds using Finology Ticker’s banking ratios screener, which is designed specifically for banks and NBFCs.

Conclusion

The PSU banking rally of 2025 is not speculative. It is rooted in cleaner balance sheets, stable profitability and a valuation gap that is still wide.

This is not a short-term trade. It is a structural opportunity driven by India’s under-banked economy, infrastructure expansion and improving financial discipline.

For long-term investors, PSU banks offer something rare in today’s market: improving fundamentals at reasonable prices.

The key is not buying every PSU bank, but identifying the ones with the strongest execution. And that requires data, comparison and consistency, something investors can now do efficiently using banking-specific tools and analysis on Finology Ticker.

As history shows, when good businesses stay cheap for too long, markets eventually re-rate them. PSU banks appear to be at that inflexion point.

Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.