At State Bank of India, the largest bank and largest sectoral bet for financial institutions in India, foreign ownership rose from 9.57% to 10.34%. Canara Bank saw FII holdings rise from 11.89% to 14.61%, while Bank of Baroda witnessed a jump of 113 basis points to 9.84% and Bank of India rose 158 basis points to 5.82%.The institutional rush comes as PSU banking stocks have delivered eye-popping returns, with Indian Bank up 73% and Bank of India up 68% in the past year. Union Bank of India and Canara Bank have gained over 50% each, while SBI is up 39% and Bank of Baroda is up 34%.
“For the first time in over a decade, PSU banks are also growing their loan books faster than private sector banks, indicating they are regaining market share and customer confidence,” said Manish Srivastava, executive director, Anand Rathi Wealth Limited.
The turnaround has been driven by greatly improved asset quality, with bad loans falling significantly and balance sheets becoming much stronger. Still, analysts say valuations remain reasonable despite the rally.
“Despite the sharp rally, PSU banks remain fairly valued when judged by their improved fundamentals,” Srivastava said. “Strong performers like Indian Bank and Canara Bank have delivered returns of 61% and 55% respectively. They continue to trade at reasonable valuations.”
Comparatively, PSU banks still trade at a discount to private sector banks, which typically command a price-to-book value of 2-3 times, reflecting a higher and more consistent ROE. This suggests that while PSU banks are no longer cheap, they are not overvalued either, provided earnings momentum continues.
Explaining the valuation opportunities, Alok Singh, CIO of Bank of India Mutual Fund, said: “PSU banks are very well positioned as they trade at the cheapest valuations in the banking industry. Even some of the large PSU banks trade at much lower valuations compared to their peers, mainly because they were not as efficient. As we are seeing now, they are becoming equally efficient. As improvements in business model efficiency and NPAs are managed well, I think the valuation gaps should start to close.”
Endorsing the positive momentum, Anshul Saigal, founder of Saigal Capital, said: “The performance of PSU banks has actually been quite robust in the context of where the markets are and how expectations are set. More importantly, the credit costs that many of these banks have shown have also been in line with or better than expected. All this for the valuations at which these banks are trading bodes well for the space.”
Rahul Sharma of JM Financial Services highlighted specific opportunities: “You can look at companies like SBI, you can look at companies like Canara Bank or Bank of Baroda, or better yet, PSU bank BeES, the ETF that essentially looks after the entire sector on its own.”
Of the 12 PSU banks, the Central Bank of India was the only one where FII share declined, falling marginally to 0.85%, while foreign ownership at Punjab & Sind Bank remained stable at 0.16%.
Mutual funds were also net buyers at PNB, Central Bank of India, Indian Overseas Bank, UCO Bank and Union Bank of India, although they posted gains at Indian Bank, Bank of India, Canara Bank, SBI and Bank of Baroda.
Looking ahead, Srivastava sees Budget 2026 as a potential catalyst: “Expectations include faster progress on the privatization of select banks, which has historically unlocked shareholder value, and a clearer roadmap for building large, globally competitive banking institutions. Potential changes in voting rights and ownership structures could further improve foreign investor participation.”
He added that continued government spending on infrastructure should support credit growth, while stable interest rates help support profitability. However, he cautioned that “the performance of PSU banks has not been uniform”, pointing out that weaker performers such as Punjab & Sind Bank are trading at expensive 16.49 times earnings despite poor operational performance.
For retail investors, Srivastava advised, “Investors who are already invested can remain invested as the improvement in earnings, loan quality and growth indicates that this is not a short-term rally. However, new exposure through sector funds or ETFs should be avoided due to their cyclical nature, with diversified equity funds offering a more balanced long-term approach.”
The transformation of PSU banks from laggards in the banking system to favored investors marks one of the most dramatic sector reversals in Indian equities, with institutional money now chasing what was once considered uninvestable.
(Credit: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)
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