The valuation gap between public sector banks and private lenders has begun to narrow in recent months as they continue to report stronger balance sheets and sustained profitability.
Data from NSE shows that the gap in the price-to-earnings (P/E) ratio between the Nifty PSU Bank Index and the Nifty Private Bank Index moderated to about 9.41 as on March 13, compared with 11.85 in December.
However, the interesting part is that this happened because the P/E of private banks declined while it was steady PSUs. The P/E ratio of the Nifty PSU Bank Index stood at 8.45x as on March 13, largely unchanged from 8.44x in December. In contrast, the Nifty Private Bank Index saw its P/E ratio decline from 20.29x to 17.86x during the same period, leading to the narrowing valuation differential.
Last March, the PSU bank P/E ratio stood at 6.11x whereas for private banks, it was 14.46x. Since then, private banks rose sharply till December before it fell. In comparison, PSU banks have shown a slow but steady rise.
“We believe that balance sheet strengthening and strong, sustained earnings visibility has resulted in a valuation catch-up for PSBs (public sector banks), thereby narrowing the gap versus their private peers,” said Dnyanada Vaidya, research analyst – BFSI at Axis Securities.
Divergent Stock Performance
The rally in the PSU bank stocks reflect this outperformance. The Nifty PSU Bank index has gained 3.26% in the past three months, while the Nifty Private Bank index has fallen 11.43%. Over a one-year period, PSU banks have rallied 47.25%, significantly higher than the 6.49% rise in the private bank index. Over three years, the PSU bank index has surged 127.32%, compared with 26.88% for private banks.
Individual stock performance also reflects the divergence between the two segments. Among public sector lenders, shares of State Bank of India rose 8.7% between December 12 and March 13, while Union Bank of India gained nearly 14% and Bank of India advanced 6.4%. In contrast, several private bank stocks declined during the same period, with HDFC Bank falling 18.6%, ICICI Bank slipping 8.1% and Axis Bank declining 6.7%.
Analysts said the shift partly reflects relatively slower growth among private lenders and balance sheet adjustments underway in the segment. Private banks have delivered comparatively slower loan growth, while loan-deposit ratios have remained elevated as lenders attempt to rebalance their funding mix. At the same time, stress in unsecured retail segments has kept credit costs relatively higher.
New Banking Landscape
“Recently, public sector banks have been growing more rapidly in terms of credit growth. There has been some reduction in provisioning as well. They come at a much lower yield and the spreads appeared to be bottoming out in the December quarter,” said Dhananjay Sinha, chief executive officer and co-head of institutional equities at Systematix Group.
According to CareEdge Ratings, scheduled commercial banks recorded net advances growth of 13.4% year-on-year in the quarter ended December, supported by festive demand and lending across housing, MSME and corporate segments. Public sector banks continued to outpace private peers in loan growth during the period. However, deposit mobilisation lagged credit offtake, with deposits growing 10% year-on-year, reflecting subdued current account and savings account (CASA) accretion and a shift towards higher-yield term deposits, the report said.
Scheduled commercial banks’ net interest income (NII) grew 4.9% year-on-year in Q3FY26, while net interest margins (NIMs) declined 14 basis points to 2.92% due to compressed spreads as lending rates adjusted faster than deposit costs. Sequentially, margins improved marginally by 3 basis points, indicating some stabilisation in spreads. Both public sector banks and private banks recorded a year-on-year decline in NIMs, although private banks posted a slightly higher sequential uptick, the report said.