Public Sector Banks were in a deep mess during the previous lending boom because they avoided recognising bad loans as bad loans. However, when the Reserve Bank of India (RBI) compelled them to reorganize such bad loans, the hidden stress finally came to the surface. As of 31 March 2018, banks’ non-performing assets (NPAs) stood at ₹10.4 trillion, of which ₹9 trillion belonged to public sector banks (PSBs) alone.
However, the clean-up of accounts, government ₹2.1 trillion bank recapitalisation plan, and write-offs gradually shifted the tide. Since then, the banking sector’s NPA has decreased by 59% to ₹4.3 trillion (as of 31 March 2025), while that of PSBs has declined by 69% to ₹2.8 trillion, according to the Indian Banks’ Association. As a result, the gross NPA has also declined to 2.6% from 14.6% during the period, according to the Government of India.
As these measures worked their way through the system, PSBs rebuilt their balance sheets, shedding the weight of legacy stress. In FY25, PSBs reported a record profit of about ₹1.8 trillion, demonstrating strong financial performance, lower credit costs, and robust asset quality. In fact, their net NPA declined to a multi-year low of 0.5%, showing strong asset quality.
Dalal Street is also heavily favoring the sector. The Nifty PSU Bank index has returned 29% over the past year, outperforming the Nifty 50 (10.5%), Nifty Private Bank (14.4%), and Nifty Bank (16.2%). To answer this, we turned to the price-to-book multiple, which remains the most useful lens for comparing banks on valuation. This helped us identify three PSBs that continue to look inexpensive despite the sharp run-up.
Let’s take a look…
#1 Bank of Baroda: India’s 2nd Largest PSB
Bank of Baroda (BoB) is the second-largest bank by market cap, after the State Bank of India. The Bank’s technology infrastructure comprises 16,574 digital touchpoints, including 9,497 ATMs, 48 Digital Banking Services, 18 Digital Service Outlets, and 5,041 Self-Service Passbook Kiosks.
Digital strength driving customer acquisition
The bank holds significant market shares in digital transactional segments, ranking second in Debit Card Issuance and third in UPI remittance and IMPS Beneficiaries. Digital channels account for 99% of new savings account acquisitions and 96% of new self-help group acquisitions.
Digital strength and expanding business scale
As of September 2025, BOB’s global gross business increased by 10.5% to ₹27.8 trillion. The majority of this business (₹23.2 trillion) was generated in India, with the remainder being generated overseas. Of this, global deposits grew 9.3% to ₹15 trillion, while advances increased 11.9% to ₹12.8 trillion.
Broad-based growth across deposits and advances
Deposits grew by a robust 9.7% year-on-year to ₹12.7 trillion in Q2 FY26, while the current account to savings account ratio (CASA ratio) declined by 110 basis points (bps) to 38.4%. Within the advances mix, gross domestic advances grew by 11.5% to ₹10.5 trillion, driven by broader growth across home loans (+17.6%), vehicle loans (+16.5%), personal loans (+18.6%), and mortgage loans (+19.8%).
The bank performed well on the earnings front. Net interest income (NII) rose 2.7% year-on-year to ₹119.5 billion in the second quarter of FY26. Interest income increased 4.1% to ₹315.1 billion, while interest expense increased 4.9% to ₹195.6 billion. Interest income declined due to loan repayments following interest rate cuts, impacting NII.
BOB Key Performance Indicators
Earnings momentum, asset quality gains, and the road ahead
As a result, Net Interest Margin declined by 15 bps to 2.9%. Asset quality continues to improve. Gross Non-performing Assets (GNPA) declined by 34 bps to 2.2%, while Net NPA fell by 3 bps to 0.6%. However, net profit declined by 8.2% to ₹48.1 billion, primarily due to a high base from last year (resulting from one-off recovery) and a 7.42% increase in the cost-to-income ratio.
Excluding this one-time item from Q2 FY25, net profit increased by 22% in Q2 FY26. The bank’s return on assets stood at 1.1%.
Looking ahead, the bank aims to grow its advances by 11-13% in FY26, led by the retail book, which is expected to increase by 18-20%. Management is confident in achieving this target due to a strong pipeline, including approximately ₹400 billion of sanctioned loans yet to be disbursed and another ₹250 billion or so proposals under process.
The NIM is expected to be range-bound in Q3 as the full effect of asset repricing catches up. However, it is anticipated to pick up in Q4, with full-year NIM expected to be 2.9-3%.
#2 Punjab National Bank: India’s 3rd largest PSB
Punjab National Bank (or PNB) is India’s 3rd largest PSB, trailing Bank of Baroda and State Bank of India. PNB has an extensive physical presence, comprising 10,228 domestic branches, 11,187 ATMs, and 32,278 Business Correspondents, totaling 53,693 touchpoints. Internationally, PNB has branches in Dubai, subsidiaries in London, Bhutan, and representative offices in Myanmar and Bangladesh.
Business growth remains steady across deposits and advances
As of September 2025, PNB’s global gross business was ₹27.8 trillion (up 10.6% year-on-year). The majority of this business (₹26.8 trillion) was generated in India, with the remainder being generated overseas. Of this, global deposits grew 10.9% to ₹16.2 trillion, while advances increased 10.1% to ₹11.7 trillion.
Deposit mix shifts as CASA ratio softens
Domestic deposit growth remained strong, rising 10.4% to ₹15.6 trillion, while advances increased 10.5% to ₹11.2 trillion. Within the deposit mix, current accounts grew 9%, while savings accounts increased 4.2% to ₹5.1 trillion. However, the share of domestic current and savings accounts (CASA Ratio) declined by 220 basis points to 37.3%.
Broad-based credit expansion
In the credit mix, corporate and others contributed 43.2% (₹4.8 trillion), followed by retail (24.4%), agriculture (16.5%), and MSME (16%). Overall advances growth remained strong, with loans to retail increasing 8.8% to ₹2.7 trillion, followed by agriculture (+13%), MSME (+18.6%), and corporate and others (+7.9%).
PNB Key Performance Indicators
Margin pressure weighs on NII despite higher interest income
With strong growth in advances, interest income increased by 6.7% to ₹31.8 billion. However, the bank ended up paying 10.6% more in interest than it earned, taking its interest expense to ₹21.4 billion. Consequently, net interest income declined by 0.5% to ₹10.5 billion, while net interest margin also fell by 34 bps to 2.7%.
Asset quality has been showing constant improvement. Gross non-performing assets (NPA) declined by 103 bps to 3.5%, while net NPA improved by 10 bps to 0.4%. The slippage ratio is at a low of 0.71%, indicating that fresh stress additions have decreased significantly, and the loan book is performing well in the current cycle.
The company’s provision coverage ratio also remained at its highest level at 96.9%, enabling it to address any impaired assets. Credit costs remained negative, indicating that excess provisions previously made have now been reversed. Collectively, this helped the company to report a 14% year-on-year growth in net profit to ₹49 billion. Book-value per share rose 21% to ₹95.9. Return on Assets also improved by three bps to 1.1%.
Profitability set to improve as the cycle turns
Looking ahead, PNB expects improvement in profitability, primarily driven by expected NIM expansion (up to 15 bps over the next two quarters) and continued improvement in operating efficiency. A 30-40% repricing of term deposits is expected during the third and fourth quarters, which is likely to boost NIM. Furthermore, a reduction in the cash reserve ratio may also support expansion.
The Return on Asset, which reached 1.05% in Q2 FY26, is expected to increase further due to improved NIM and sustained operational efficiency. Management expects to touch an ROA of around 1.10% in Q3 and over 1.1% in FY27. Deposit growth is expected to be 9-10% in FY26, with a CASA ratio of over 38%. The bank also plans to reduce GNPA to below 3% and NNPA to below 1% by FY26.
#3 Canara Bank: India’s 4th largest PSB
Canara Bank stands in the 4th place after PNB. The bank maintains an extensive distribution network, which includes a total of 9,948 domestic branches as of September 2025. Within this domestic network, there were 9,321 general and 627 specialized branches. Internationally, Canara Bank has four overseas branches in New York, London, and Dubai.
Extensive branch network and physical footprint
Canara Bank’s physical and assisted digital presence comprises 7,405 ATMs, 3,461 Recyclers, and 11,076 Business Correspondent Points. The total number of banking outlets (Domestic Branches plus BC Points) amounted to 21,028. Domestically, the branch network is segmented into Rural (32%), Semi-Urban (30%), Urban (19%), and Metro (19%) areas.
Strong business growth across deposits and advances
As of September 2025, Canara Bank’s Global Business increased by 13.55% year-on-year to ₹26.8 trillion. The majority of this business, ₹24.8 trillion, was generated domestically, with the remaining ₹2.03 trillion generated overseas. Of this total business, global deposits grew 13.40% to ₹15.28 trillion, while global advances increased 13.74% to ₹11.51 trillion.
The bank achieved a robust growth in deposits and advances, particularly in its domestic segment. Domestic deposits grew by 12.62% to ₹13.9 trillion. Current Account to Savings Account) deposits increased by 10.53%, marking the first time in several years that CASA growth exceeded 10%. However, the domestic CASA ratio stood at 30.69%.
Within the advances mix, domestic gross advances grew by 13.34% to ₹10.81 trillion. This growth was driven by the RAM (Retail, Agriculture, MSME) sector, which collectively grew by 16.94%. Asset quality stayed strong, too, with Gross NPA down 138 bps to 2.4%, and Net NPA down by 45 bps to 0.5%.
Canara Bank Key Performance Indicator
Earnings impacted by rate cuts, but profitability improving ahead
Net Interest Income declined by 1.9% year-on-year to ₹91.4 billion in Q2 FY26. Total Interest Income increased 6.07% to ₹315.4 billion, while total interest expense increased by 9.68% to ₹224.0 billion. Consequently, NII declined by 1.9%, primarily due to the immediate impact of the 100 bps cut in the repo rate by the regulator.
This impacted 45%-46% of the bank’s loan book, as the benefit of transferring the reduction to deposit rates takes about 9 to 12 months. Still, net profit rose by 18.9% to ₹47.7 billion. The bank’s book value stood at ₹106.6 per share, while Return on Assets stands at 1.1%.
Looking ahead, the bank has already exceeded or nearly met most of the key performance indicators (KPIs) set for FY26. Out of 13 parameters given as guidance, 11 have already been achieved. The bank anticipates that the Net Interest Margin (NIM) will improve starting from the fourth quarter.
Valuation at discount to Nifty PSU bank and private banks peers
On valuations, all three banks trade close to 0.9x price-to-book (P/B). The multiples sit above their 10-year median, yet they remain below the broader PSB sector’s P/B of around 1.2x. It’s also worth noting that PSB valuations had compressed over the past decade largely because profitability stayed weak. As this credit cycle broadens and earnings improve, that drag may ease.
Valuation Assessment (X)
| Banks | Price-to-Book | 10-Year Median P/B |
| PNB | 0.9 | 0.6 |
| Bank of Baroda | 0.9 | 0.8 |
| Canara Bank | 0.9 | 0.6 |
| Nifty PSU Bank P/B | 1.2 | |
In that scenario, further re-rating looks possible, especially when set against the Nifty Private Bank P/B of nearly 1.5x. Moreover, these PSBs are large banks, and as governance improves, which is possible as the Indian government considers raising the foreign direct investment limit to 49% (from the current 20%), the gap with private banks, which trade at nearly 2x P/B, could narrow further.
However, it remains a long-term story that hinges on consistent profitability, professional management, stringent asset quality, even during periods of stress (like private banks), and deeper diversification into other products (such as credit cards). Acquisition financing, as proposed by the RBI, can also support diversification.
Disclaimer
Note: Throughout this article, we have relied on data from http://www.Screener.in and the company’s investor presentation. 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 educational purposes only.
About the Author: Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.
A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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