Five years ago, most investors didn’t want even to consider investing in public sector banks. The reasons were apparent. Bad loans were rampant across the banking system. A decade of aggressive corporate lending had come back to plague balance sheets.
Discussions around provisioning, stressed property, and capital obligations dominated the quarterly earnings. For many PSU banks, the question was not how quickly they could grow, but whether they could regain their glory.
Today, the situation looks remarkably different. Gross non-performing assets have fallen sharply across much of the sector. Profitability has rebounded. Return ratios have improved.
Capital is stronger than it has been in years. Banks that once represented the extremes of India’s credit boom are now recording their highest profits. Yet investors continue to be cautious.
While prominent private-sector banks continue to command premium valuations, many PSU lenders still trade at around one times book value or less. The market has accepted the recovery. The bigger question is whether it has fully valued it in.
That question becomes particularly interesting when considering three banks that were once deeply influenced by the bad-loan cycle but have since undergone substantial improvements: Punjab National Bank, Canara Bank, and Bank of Baroda.
The Crisis That Defined A Generation Of Bank Stocks
To understand why PSU banks still trade at a discount, a revisit to the time that generated that discount is a must.
The roots of the crisis lie in India’s investment boom of the late 2000s and early 2010s. Banks insistently funded infrastructure projects, steel plants, power projects, and large corporate expansions. But delayed approvals, unfinished projects, weak prices, and rising loans added to business stress. That meant bad loans across banks rose dramatically.
For decades, the real problem was hidden because of loan restructuring programmes. But the launch of Asset Quality Review (AQR) in 2015 by the Reserve Bank of India was the turning point. It forced banks to recognise bad debts early, which is why gross NPAs rose across the banks. Several PSU banks suffered massive losses. Their capital requirements grew while investor confidence collapsed
The crisis changed how the market viewed public sector banks. Even after the balance sheets improved, the doubt persisted. That lingering doubt is now at the heart of the valuation debate.
The Numbers Suggest The Repair Is Largely Complete
The change becomes apparent when evaluating where these banks stood during the peak bad-loan cycle and where they stand today.
| Bank | Peak GNPA (FY18) | FY26 GNPA | FY26 Net Profit (excl. exceptional items) |
| Punjab National Bank | 18.38% | 2.95% | ₹18,460 crore |
| Canara Bank | 11.84% | 1.84% | ₹19,783 crore |
| Bank of Baroda | 12.26% | 1.89% | ₹20,058 crore |
The contrast is difficult to ignore.
All three banks have significantly reduced bad loans. All three have reported profits that would have looked impossible during the worst years of the banking crisis. Yet their valuations continue to be modest compared to their private-sector peers. The clean-up seems mostly complete. The rerating story, however, feels incomplete.
Punjab National Bank: Has The Market Forgotten The Numbers But Not The Past?
If there is one bank that still endures the psychological baggage of the non-performing Assets (NPA) era, it is Punjab National Bank.
For investors, PNB is still closely linked with one of the most chaotic periods in Indian banking history. The bank became a symbol of the troubles the PSU lenders faced, from strained corporate exposures to governance issues and inadequate profitability.
That history still shapes perception. And the problem is that the numbers no longer tell the same story.
At the peak of the bad-loan cycle, PNB’s FY18 Gross NPA ratio was 18.38%. In FY26, that number has fallen to 2.95%, while the net NPAs have declined to just 0.29%. The bank reported a consolidated net profit excluding exceptional items of ₹18,460 crore, a remarkable shift from the years when provisioning ate much of its earnings power.
PNB Business Position FY26
The improvement goes beyond asset quality. The return on equity is 15.67% while the capital adequacy stays comfortable at 17.74%. The cost of credit has regularised in FY26, yet the market values the bank at 0.83x its book value. Part of that may signal caution. That same caution is evident in its stock price, which rose at a compounded rate of 6% in one year.
Punjab National Bank 1-Year Share Price
Investors tend to forgive banking mistakes slowly because the consequences of getting them wrong can be severe. A few years of robust performance may not be sufficient to wipe out memories built over an entire credit cycle.
It trades at a P/E of 6.75x, lower than the sectoral median of 8.44x. But as profitability improves and asset quality remains stable, the gap between perception and reality becomes harder to ignore. Raising the question: Has Punjab National Bank repaired its balance sheet sooner than it has fixed its reputation?
Canara Bank: When Strong Fundamentals Are Not Enough
Unlike PNB, Canara Bank’s challenge is not one of standing. Its U-turn has been noiseless, more systematic, and possibly more striking from an operational perspective.
Over the past several years, the bank has steadily improved asset quality, consolidated profitability, and increased shareholder returns. Gross NPAs in FY26 have fallen to 1.84%, while net NPAs have declined to just 0.43%. Provision coverage has improved by 151 bps YoY, and credit costs have moderated to 0.59% YoY.
What’s more, the earnings profile has changed significantly, too. The bank’s consolidated revenue for FY26 was ₹1,26,371 crore, while net profit, excluding exceptional items, was ₹19,783 crore, placing it among the most profitable public-sector lenders in India.
Canara Bank Guidance vs. Actual Performance
Return on assets is now around 1%, while return on equity has moved into the mid-to-high teens at 16%. These are levels that increasingly feel like robust banking chains instead of conventional PSU-bank metrics. The same trend continues in its share price, which grew at a compounded rate of 25% in a year.
Canara Bank 1-Year Share Price
Yet the valuation remains firmly anchored in PSU territory. The stock trades at roughly 1.04x its book value despite metrics that would usually draw greater investor pursuit. Also, its 6.64x P/E is at a discount, compared to the sectoral median of 8.44x.
One explanation could be that investors still doubt its sustainability. Another factor could be that PSU banks continue to be seen through a broad sector lens instead of being assessed separately. Either way, the disconnect is important.
Canara’s financial profile increasingly resembles that of a stronger banking franchise. Its valuation still resembles that of a turnaround story. Is the market overlooking one of the strongest banking recoveries of the past decade?
Bank of Baroda: A Better Bank Than Its Multiple Suggests?
Among the three banks, Bank of Baroda presents perhaps the clearest valuation debate. The bank has spent years showing that its U-turn is not just cyclic. Asset quality has improved greatly, profitability has gone up, and the return ratios have, in turn, become healthier.
The bank’s profit after tax, excluding exceptional items, was ₹20,058 crore for the first time in years in FY26. The revenue was ₹1,34,298 crores during the same period. The Gross NPAs fell to 1.89%, compared to its double-digit levels during the stress years. Return on assets has moved above 1%, while return on equity stands comfortably at 15.39% for the financial year.
BOB Performance Drivers FY26
Source: May 2026 Investor Presentation
A look at these operating metrics will tell you Bank of Baroda is much stronger today than it was at any point during the NPA cycle. Its share price has grown at a CAGR of 22% in a year. Yet investors are still unsure.
BOB 1-Year Share Price Trend
The bank trades at almost 1x its book value, while private-sector peers such as ICICI Bank and HDFC Bank command significantly higher multiples of 2.71x and 2.06x, respectively.
However, Bank of Baroda does not necessarily justify the same valuation as the private peers. Private banks continue to enjoy robust deposit franchises, excellent calculated flexibility, and a longer track record of value creation.
But the gap is quite significant. Even when compared with the State Bank of India, a PSU bank that has experienced a meaningful rerating in recent years, Bank of Baroda’s valuation seems limited. The question is no longer whether the bank has improved. The question is whether its valuation adequately reflects that improvement.
The Valuation Gap In One Table
The disconnect becomes even more noticeable when profitability is compared with valuation.
Peer Comparison (ROE vs P/B)
| Bank | ROE | P/B |
| Punjab National Bank | 13% | 0.84x |
| Canara Bank | 16% | 1.04x |
| Bank of Baroda | ~15.39% | 0.89 |
| SBI | ~15% | 1.61x |
| ICICI Bank | ~16% | 2.71x |
| HDFC Bank | ~14% | 2.06x |
The comparison emphasizes the core puzzle. Valuation does not follow profitability alone. If it did, the difference between PSU banks and private-sector peers would likely be slimmer. Instead, the market seems to be pricing something beyond current earnings and return ratios. That “something” is where the debate begins.
What Is The Market Still Worried About?
The answer rests in worries that go beyond periodical profits. Government ownership is still one of the largest factors. Investors often add a fundamental discount to PSU institutions because they suppose government control can influence capital allocation, planned flexibility, and long-term value creation.
Growth is another concern. Private-sector banks are still expected to multiply earnings sooner over longer periods, specifically in high-margin retail segments.
Deposit franchises also matter. Current Account and Savings account numbers are still among the most important competitive advantages in banking, and several private banks preserve a meaningful lead in drawing low-cost deposits.
Then there is the question of income margins. With the interest-rate cycle changing, investors are intently watching how banks supervise net interest margins and whether profitability can continue to be durable.
Perhaps the biggest concern, however, is sustainability. The market is no longer asking whether PSU banks have fixed their balance sheets. It is asking whether the change can survive an entire credit cycle.
That is a much higher standard.
The Bigger Question For Investors
Five years ago, investors wanted cleaner balance sheets from PSU banks. Many have provided it. Bad loans have dropped sharply. Profitability has improved. Capital positions are stronger. Return ratios have recovered. So, this conversation has shifted from survival to valuation.
Punjab National Bank, Canara Bank, and Bank of Baroda each symbolize a different version of the same story. One continues to fight a reputation discount. Another works to become well-known for improving quality. And the third faces a valuation gap that seems difficult to defend through current fundamentals alone.
The question is no longer whether these banks can survive. The question is whether they can persuade investors that the revolution is permanent. Until that happens, the clean-up story may stay unfinished, not on their balance sheets, but in their valuations.
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Disclaimer
Note: We have relied on data from the May 2026 investor presentation, www.Screener.in, throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Archana Chettiar is a writer with over a decade of experience in storytelling and, in particular, investor education. In a previous assignment at Equentis Wealth Advisory, she led innovation and communication initiatives. Here, she focused her writing on stocks and other investment avenues that could empower her readers to make potentially better investment decisions.
Disclosure: The writer and her dependents do not hold the stocks discussed in this article.
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