PSU Banks vs Private Banks: A Comparative Analysis for Investors This Earnings Season

PSU Bank Stocks Shift Focus to Sustainability Ahead of Q4 Earnings Season

As the fourth-quarter earnings season approaches, the spotlight is now on sustainability as the focus shifts from the strong year-end rally in PSU bank stocks. Public sector lenders have delivered sharp gains backed by improving fundamentals, but brokerages believe underlying trends in deposits, margins, and earnings quality could drive a shift in investor preference.

Over the past 12 months, PSU banks have significantly outperformed, with the Nifty PSU Bank index rising 41%, compared to a 5% gain in the Nifty Private Bank index. This rally was supported by improving asset quality, profitability, and growth momentum across PSU lenders. Sector-wide credit growth has picked up to around 15% year-on-year, led by PSU banks, small finance banks, and mid-sized private lenders, according to a recent report by Axis Securities. However, the brokerage cautioned that deposit growth continues to lag, keeping funding costs elevated and competition for CASA intense.

Deposit Growth and CASA Competition

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As seen in the table above, PSU banks have struggled to maintain deposit growth, with a 8% increase in deposits over the past year, compared to 10% for private banks. The CASA share of PSU banks has also declined from 58.6% in March 2024 to 57.8% by December 2025.

Nomura believes that much of the re-rating in PSU banks is already priced in, with the sector trading at around 1.3 times one-year forward book value, about 27% above their 10-year average and near +1 standard deviation levels. In contrast, private banks have de-rated to around 2 times one-year forward book value, well below their long-term average of 2.8 times.

Earnings Quality and Leverage

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Nomura also highlighted differences in earnings quality between PSU and private banks. PSU bank profitability has been supported by treasury gains and recoveries from written-off loans, while private banks derive a larger share of earnings from core lending and fee income. Over FY24 to 9MFY26, non-core income contributed 20-40% of PPOP for PSU banks, compared with 5-13% for large private banks.

Furthermore, Nomura noted that PSU banks have grown loans faster than deposits since FY23, resulting in a steady loss of deposit market share. PSU banks have also relied on drawing down statutory liquidity ratio (SLR) buffers to support loan growth, with SLR falling from around 25% in FY21-22 to about 20% in Q3FY26, approaching regulatory thresholds.

However, Axis Securities pointed out that asset quality trends remain stable across the sector, with stress in unsecured portfolios expected to ease, providing support to earnings visibility. Nevertheless, Nomura flagged higher leverage as a key risk for PSU banks, with state-owned lenders operating with balance-sheet leverage of 12-17 times, compared to 6-9 times for private peers. This asymmetry in earnings risk is a structural, not cyclical, disadvantage for PSU banks, and it means headline ROE comparability in the current benign environment is misleading.