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Nifty PSU Bank index surges 3%; SBI, IOB, Canara, Union Bank rally up to 4%
Public Sector Banks price movement today
Shares of public sector banks (PSBs) were in focus, with frontline stocks gaining up to 4 per cent on the National Stock Exchange (NSE) in Friday's intra-day trade in an otherwise subdued market.
State Bank of India (SBI), Indian Bank, Indian Overseas Bank (IOB), Bank of Maharashtra, Union Bank of India, Uco Bank, Punjab & Sind Bank, Central Bank of India, Canara Bank, Bank of Baroda and Punjab National Bank were up in the range of 2 per cent to 4 per cent.
At 01:37 PM; Nifty PSU Bank index, the top gainer among financial indices, was up 2.8 per cent, as compared to 0.25 per cent decline in Nifty 50. Nifty Financial Services and Nifty Private Bank were down 0.09 per cent and 0.22 per cent, respectively, while Nifty Bank was up 0.22 per cent.
What's driving the rally in PSU Banks?
According to a Times of India report, India's public sector banks have spearheaded a remarkable turnaround, driving the banking sector to record profits of ₹3.71 trillion. Fueled by increased lending income and reduced nonperforming assets (NPAs), PSU Banks saw a 26 per cent profit surge, nearing private bank's earnings.
Meanwhile, according to analysts at YES Securities, PSU banks are relatively better placed to handle margin. The coverage PSU banks viz. SBI, BOB and India Bank will need a relatively smaller reduction in deposit rates compared with large cap private sector banks.
The brokerage firm's exhaustive analysis reveals that the Q4FY26 net interest margin for SBI, BOB and Indian Bank would be 2, 13 and 22 bps lower than Q4FY25 levels if no further deposit rate cuts are effected.
The primary aspect that protects the select PSU banks is their high share of MCLR, which ranges between 52-60 per cent. Some private sector banks have cut 1-year MCLR by 5-25 bps over Feb-May 2025, which is a smaller quantum compared with the 50 bps repo rate cut effected over this period.
Secondly, this MCLR reduction will flow through MCLR (Marginal Cost of Funds based Lending Rate) book only over a period of time. Thirdly, coverage PSU banks are yet to cut 1-year MCLR during this period. MCLR is a discretionary metric although, on paper, it is said to be formulaic. The tenor premium allows management to exert material discretion over MCLR.
Going forward, stable private sector banks will have limited room to cut SA rates unless PSU banks make a move first, the brokerage firm said in banking sector report.
The Reserve Bank of India (RBI) has cut rates by 25 bps each in February and April 2025 and is expected to deliver 25 bps cuts each in June and August 2025.
Ample banking system liquidity and subdued credit demand are expected to drive a sharp decline in deposit rates along with reduction in rates on EBLR loans. Banks with a strong deposit franchise and faster balance sheet growth will be better positioned to pass on rate cuts effectively, according to SBI Capital Markets.
Furthermore, the anticipated relaxation of the Liquidity Coverage Ratio (LCR) norms, combined with currently elevated LCR buffers, could allow banks to reduce their excess liquidity by up to 6pp - unlocking additional capacity for credit expansion. Supported by trading gains, robust fee income, and historically low NPAs, banks are well-placed to sustain record profits in FY26, the brokerage firm said Indian Banking sector report.
Overall, asset quality outlook is stable to positive for the sector, except for the unsecured retail loans and microfinance institution (MFI) segment. The brokerage firm Mirae Asset Sharekhan believes banks with a robust capital base, strong asset quality, and healthy retail deposit franchises are well-placed to capture growth opportunities.
However, according to Motilal Oswal Financial Services, the latest channel check reaffirms its view that the systemic credit growth will sustain at 11-12 per cent YoY for FY26E (similar to FY25 levels) with lenders prioritizing asset quality amid tighter underwriting and higher risk aversion. Retail disbursals are flowing selectively into high-score, well-documented profiles, while unsecured and surrogate loans are facing elevated scrutiny.
Corporate lending is being driven by demand for working capital and policy-linked sectors, even as borrowers increasingly favor low leverage and higher reliance on internal funding. The brokerage firm thus estimates corporate loan growth to remain modest during FY26E as well. PSU banks continue to lose ground due to tech and turnaround time (TAT) challenges, while private players leverage better execution and commission dynamics to win market share.
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