A sharper focus on secured retail assets—particularly housing and vehicle loans—and limited exposure to unsecured segments such as microfinance, credit cards, and personal loans, and the early transmission of repo rate cuts that helped reprice deposits faster have collectively enabled public sector banks (PSBs) to outperform private banks in the December 2025 quarter (Q3FY26).
These advantages, combined with sustained improvement in asset quality and lower provisioning requirements, have strengthened PSBs’ profitability and business momentum over the past several quarters.
An analysis of 10 quarters of data across 27 banks—including 11 state‑run banks and 16 private lenders—shows that PSBs have consistently delivered stronger financial performance on the back of healthier credit–deposit dynamics and disciplined underwriting.
On an aggregate basis, the 11 PSBs reported a robust 14.5% year‑on‑year rise in net profit. Large lenders such as Canara Bank, Union Bank, and Indian Bank continued their steady upward trajectory, supported by improving margins and expanding loan books.
Gross NPAs for PSBs have now declined to the 3–4% range, while net NPAs have fallen below 1%—a multidecadal low. Provisions remained moderate, with several banks reporting sequential declines, further boosting quarterly profitability.
In contrast, private banks posted flat to marginally lower profit growth. The 16 private lenders recorded a modest 2.8% year‑on‑year rise and a 0.5% sequential increase in net profit, weighed down by elevated provisioning and tighter liquidity conditions.
Retail Strategy Drives Performance
Siddharth Rajpurohit, Lead Banking Analyst at Systematix, said, “Enhanced focus on the retail loan segment and relatively lower exposure to unsecured retail loans—including credit cards, personal loans, and microfinance—has been a key reason why state‑run banks have outperformed private sector banks.”
He added that stronger asset quality, lower provisioning requirements, and a healthier credit–deposit ratio have further supported their performance.
“Immediate transmission of repo rate cuts has also contributed to improved margins in the quarter for public sector banks, as they had already absorbed the impact on net interest margins in earlier quarters.” Since February 2025, the RBI has cut repo rates by 125 basis points.
The December quarter numbers reflect this clearly. PSBs reported sequential and year‑on‑year growth in net interest income, stable or improving net interest margins, and continued reduction in gross and net NPAs, supported by recoveries and disciplined credit underwriting.
Private banks, meanwhile, saw profitability pressured by higher provisioning—particularly at ICICI Bank, Axis Bank, and HDFC Bank, which were directed by the regulator to make additional provisions for priority sector lending (PSL) shortfalls. ICICI Bank set aside an extra Rs 1,283 crore, while HDFC Bank provided Rs 500 crore in Q3FY26 alone.
Higher funding costs and slower deposit mobilisation further compressed margins and constrained credit expansion for private lenders.
Superior Liquidity Management
Shrikant Chouhan, Head – Equity Research at Kotak Securities, said, “With the worst of asset quality stress behind us, net interest margins close to cyclical lows, and loan growth beginning to show signs of revival, well‑managed PSBs have delivered a stronger December quarter performance.
In an environment where deposit growth has remained subdued over the past few quarters, PSBs have been better positioned to sustain loan growth without facing immediate funding constraints.”
CASA ratios for PSBs remained stable in the 38.5–40% range, helping keep funding costs in check. Advances for PSBs also grew faster quarter‑on‑quarter, while private banks recorded slower growth due to tighter liquidity and higher deposit costs.
The market has already taken note. The Nifty PSU Bank index has risen 7% over the past month, compared with a 0.42% rise in the Nifty Private Bank index, even as the Nifty 50 declined 2.4% over the same period.