PSU banks in a sweet spot as asset quality and earnings improve: HDFC Securities

Public sector undertaking (PSU) banks are showing clear signs of a structural turnaround in asset quality and earnings, said Krishnan ASV, Analyst-Institutional Equities at HDFC Securities. “These are not transient improvements. The quality of the customer franchise, loan book, and earnings is meaningfully better,” he said.

A shift towards retail-heavy loan books has reduced risk, with PSU banks becoming more disciplined and scientific in managing credit. “The lumpiness you saw in the 2015 cycle won’t play out anymore,” Krishnan said.

Loan growth is expected at a 13–14% compound annual growth rate (CAGR), in line with the system. Smaller lenders like Bank of Maharashtra may outpace due to base effects.

Valuations remain attractive. Top picks include State Bank of India (SBI), Bank of Baroda, Bank of Maharashtra, and Indian Bank. “PSU banks are in a sweet spot offering both growth and valuation comfort,” Krishnan said.

Also Read:

RBI MPC’s Saugata Bhattacharya flags lower inflation in coming quarters

On reports of PSU banks participating in a loan to Vodafone Idea, Krishnan admitted it could be seen “not very positively” if it amounts to rescue capital, but stressed the broader corporate loan cycle continues to bypass banks in favour of bond markets.

Also Read: Vodafone Idea may stay in the game but don’t expect a turnaround: IIFL Capital

SBI’s planned ₹25,000 crore qualified institutional placement (QIP) will likely boost capital ratios by 200 basis points, strengthening its growth capacity, especially in micro, small and medium enterprises (MSME) and mid-corporate segments, he added.

For the entire interview, watch the accompanying video

Catch all the latest updates from the stock market here