Investors are increasingly broadening their exposure to bank stocks beyond the leading four private sector banks and the largest PSU Bank, State Bank of India (SBI).

And that’s because a recent SEBI circular related to Nifty Bank Index, limits the weight of the top constituents of Nifty Bank Index at 20% from 33% currently, while the combined weight of the top three constituents cannot exceed 45%, compared to the current 62%.  

The adjustment will be done in four tranches till March 31, 2026. HDFC Bank had a 28.49% weightage on the Nifty Bank, while ICICI Bank had a 24.38% weightage at the end of the September 2025.

As part of the diversification strategy, stocks like Punjab National Bank (PNB), the second-largest PSU bank, on Monday intra-day at Rs 124 was not too far from its 52-week high of Rs 124.5 that was reached earlier in the trading day. Similarly, Bank of Baroda, third-largest PSU bank, at Rs 290.9 in Monday intra-day trade, which had reached its 52-week high of Rs 292.7 early in the trading day.

Also, PSU bank stocks are in vogue with media reports indicating further consolidation in this segment.   

The Q2 P&L Test: A look under the hood

Bank of Baroda declared its results on Friday, and for a key operational parameter, net interest margin (NIM), its domestic NIM was 3.1% in the September 2025 quarter vis-à-vis 3.27% a year earlier.

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And for PNB Bank, it’s domestic NIM was 2.7% in the September 2025 quarter vis-à-vis 3.06% a year earlier.

Earlier, HDFC Bank, the largest private sector bank, had highlighted its NIM on interest earning assets was 3.4 % on total assets in the September 2025 quarter vis-à-vis 3.7% a year earlier.

The central bank had cut repo rates in its meeting in early June 2025, and while interest rates on bank loans / credit facilities have come down, interest rates on deposits with the bank come down with a lag. This has created a temporary pressure on NIMs.

Meanwhile, for another key operational parameter, credit growth, Bank of Baroda’s advances grew 12.2 % y-o-y to Rs 12.58 lakh crore in the September 2025 quarter, and it had strong demand for its gold loans along with auto loans.

PNB Bank’s advances grew nearly 11.2 % y-o-y to Rs 11.33 lakh crore in the September 2025 quarter, and the bank had strong demand for vehicle loans and home loans.

For HDFC Bank, its advances at the end of the September 2025 quarter were Rs 27.46 lakh crore, a growth of 10%. HDFC Bank’s advances to deposit ratio has been hovering well over 90% in the merged entity and it has been cautious in growing its loan book for several quarters.

Asset quality vs. Cost: How profits were shaped

Bank of Baroda’s provisions were Rs 1,232 crore in the September 2025 quarter vis-à-vis Rs 2,335.7 crore a year earlier. Its net NPA to net advances was 0.57% in the September 2025 quarter vis-à-vis 0.6 % a year earlier.

Apart from pressure on NIM, Bank of Baroda had to deal with a higher cost structure – other operating expenses were Rs 3,831.9 crore in the September 2025 quarter, a rise of 16.6% y-o-y. As a result, Bank of Baroda’s standalone net profit fell nearly 8 % y-o-y to Rs 4,809.4 crore in the September 2025 quarter.

PNB Bank’s provisions were Rs 643 crore in the September 2025 quarter vis-à-vis Rs 288 crore a year earlier.  The bank in its results presentation has highlighted higher fresh slippages in MSME loans in the September 2025 quarter vis-à-vis a year earlier. 

It’s percentage of net NPAs was 0.36% in the September 2025 quarter vis-à-vis 0.46% a year earlier.

However, PNB’s employee costs were Rs 4,747 crore in the September 2025 quarter, a fall of nearly 17% on a y-o-y basis. As a result, PNB’s standalone net profit of Rs 4,903.7 crore in the September 2025 quarter grew 14% on a y-o-y basis.    

HDFC Bank had also made provisioning to the tune of Rs 3,500 crore in the September 2025 quarter vis-à-vis Rs 2,700 crore a year earlier. HDFC Bank in its investor presentation had pointed out to floating and general provisions it has made in the September 2025 quarter, to explain the above.

Its % of net NPAs to net advances was 0.42% in the September 2025 quarter vis-à-vis 0.41% a year earlier. Higher provisioning resulted in HDFC Bank’s standalone net profit rising only 10.8% y-o-y to Rs 18,641.3 crore in the second quarter of FY 26.

The Efficiency Test: Who Is Using Assets Wisely?

Bank of Baroda’s return on assets (annualised) was 1.07 % in the September 2025 quarter while it was 1.05% for PNB Bank.

And HDFC Bank’s return on assets (average) – not annualized was 0.49% in the September 2025 quarter, and on annualizing for FY26 it would be nearly 1.96%.

The price of entry: A final look at valuations

Bank of Baroda trades at a P/E of 7.8 times, according to Screener.in, while PNB trades at 8.3 times.

HDFC Bank trades at a P/E of 21 times. 

Bank credit growth is expected to pick-up in the second half of FY26, given the recent GST cuts and the steps taken by RBI to lower lending costs.

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Investors will also be monitoring the ability of PNB, Bank of Baroda and other leading banks to protect their NIM and other operational factors over the next few quarters.

PSU banks like PNB and Bank of Baroda trade at reasonable valuations vis-à-vis private sector banks. This has been the case for a long time now, and only time will tell of and when this valuation gap narrows significantly. 

Disclaimer:

Note: We have relied on data from 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.

Amriteshwar Mathur is a financial journalist with over 20 years of experience.

Disclosure: The writer and his family do not hold the stocks discussed in this article

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