New Delhi [India], September 27 : Public Sector Banks (PSBs) are entering a new phase of profitability as their return on assets (RoA) has crossed 1 per cent, supported by stronger balance sheets, better asset quality and steady credit growth, according to a recent Motilal Oswal report.
The report said the PSB sector's profitability has touched a record high of Rs 1.5 lakh crore. It added that aggregate earnings of the banks under coverage are expected to grow at a 14 per cent compound annual growth rate (CAGR) over FY26 to FY28.
"While NIM pressure may weigh on the near-term outlook, rising fee income, a gradual moderation in cost ratios, and healthy coverage levels (PCR ~79 per cent) will help to keep RoA stable at 1.0-1.1 per cent." it said.
Stronger deposit franchises, conservative credit-deposit ratios and steady traction in the Retail, Agri and MSME (RAM) segments have also supported PSBs' momentum. The report highlighted that for the first time in 15 years, PSBs outpaced private banks in loan growth during FY25, recording 12 per cent growth compared to 10 per cent by private lenders.
"PSBs' market cap has jumped nearly 5x since FY20, yet they continue to trade at reasonable valuations even as sector RoE remains stable at 18-19 per cent and RoA at ~1 per cent," the report noted
It pointed out that the recent gains are not one-time. "The recovery in RoA to 1 per cent is not a one-off event but more like a homecoming for PSBs. With margins recovering in the second half of FY26 and asset quality remaining stable, they are well poised to deliver steady returns in the coming years," the note said.
The report added that the transformation in PSBs could mean a gradual re-rating for the sector.
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