Investors on Dalal Street are showing a strong preference for state-owned banks in 2025, with public sector lenders sharply outperforming their private sector counterparts. This rally is fueled by optimism around a pickup in credit growth, recovery in net interest margins, and a continued strengthening of asset quality, which together are supporting robust earnings momentum and re-rating prospects for the sector.
Stellar Performance and Record Returns
The Nifty PSU Bank index has surged 28% in 2025 so far, making it the top-performing sectoral index. This performance significantly outpaces the benchmark Nifty 50, which has risen 10% in the same period. Even the broader Nifty Bank index, which includes both public and private lenders, has trailed with a 16% rise, highlighting the concentrated strength in PSU stocks.
This year's rally builds on a stellar comeback that began in March, when the index broke out of a 10-month consolidation phase. The momentum accelerated further following the government's consumption-boosting measures, including GST rate cuts, which improved liquidity and the demand outlook.
Remarkably, the index is on track to extend its annual winning streak to five consecutive years. From its Covid-19 low of 1,078 points, the gauge has skyrocketed nearly 678%, delivering multibagger-like returns to investors.
Top Performers Leading the Charge
Half of the constituents in the Nifty PSU Bank index have delivered returns exceeding 20% this year. Leading the pack is Canara Bank with a sharp 48% surge, putting it on course for its biggest yearly jump since 2022. Close behind is Indian Bank, with a 49% gain in 2025, continuing a trend of sustained demand that has remained intact since 2021.
Bank of India has rebounded strongly from last year's losses, delivering a solid 41% return so far in 2025 and heading for its strongest annual performance since 2022. Union Bank of India has also bounced back with a 28% surge, marking its fifth straight year of positive gains.
The banking behemoth, State Bank of India, has rewarded shareholders with a 23% return, pushing the bank's market capitalisation past the historic ₹9 lakh crore mark for the first time. Other major PSU banks like Bank of Baroda and Punjab National Bank have also posted healthy gains of 21.41% and 17%, respectively, in the current calendar year.
Bright Outlook Supported by Fundamentals
The outlook for PSU banks remains positive, supported by favorable macroeconomic policies. The Reserve Bank of India has cut the key policy rate by a cumulative 125 basis points this year through December. Governor Sanjay Malhotra noted that the transmission of these rate cuts has been broad-based across sectors.
Analysts estimate that net interest margins (NIMs) likely reached the cycle's low in the October-December quarter for most banks, assuming no further rate cuts. Market attention is now focused on how loan growth shapes up amid the lower interest rate environment and the government's recent consumption tax reductions.
Full-year loan growth for the sector is projected at a healthy 13%, while credit costs are expected to remain stable. A key profit driver in the second half of the 2025-26 financial year is anticipated to be margin recovery, driven by the normalisation of the cost of funds due to ongoing deposit repricing and CRR cuts.
Loan growth remained robust in the second quarter of FY26, with credit expanding 11% year-on-year. This growth was largely led by the MSME, agriculture, and corporate segments, although retail growth moderated due to slower disbursements in unsecured and vehicle loans.
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