Rs 4.5 lakh crore PSU bank rally draws FII buying in these 10 stks
Foreign institutional investors (FIIs) are piling into India's public sector banks after a blistering rally added Rs 4.5 lakh crore in market capitalization over the past year, with FIIs raising stakes in 10 of the 12 PSU lenders in the December quarter as improving fundamentals and attractive valuations trigger a sea change in investor sentiment.
The buying spree was most dramatic at Bank of Maharashtra, where FII ownership more than doubled from 2.35% to 4.92% in the December quarter, while mutual funds quintupled their stake from 1.17% to 5.32%, making it the sectoral favorite among domestic fund managers.
At State Bank of India, the largest bank and the biggest sectoral bet for FIIs in India, foreign ownership climbed from 9.57% to 10.34%. Canara Bank saw FII stakes surge from 11.89% to 14.61%, while Bank of Baroda witnessed a 113 basis point jump to 9.84% and Bank of India rose 158 bps to 5.82%.
The institutional rush comes as PSU bank stocks have delivered eye-popping returns, with Indian Bank rallying 73% over the past year and Bank of India up 68%. Union Bank of India and Canara Bank have each gained over 50%, while SBI has climbed 39% and Bank of Baroda 34%.
"For the first time in over a decade, PSU banks are also growing their loan books faster than private sector banks, indicating that they are regaining market share and customer confidence," said Manish Srivastava, Executive Director at Anand Rathi Wealth Limited.
The turnaround has been driven by sharply improved asset quality, with bad loans declining significantly and balance sheets becoming much stronger. Yet analysts say valuations remain reasonable despite the rally.
"Despite the sharp rally, PSU banks continue to appear reasonably valued when assessed against their improved fundamentals," Srivastava noted. "Strong performers like Indian Bank and Canara Bank have delivered 61% and 55% returns respectively. They still trade at reasonable valuations."
From a relative standpoint, PSU banks still trade at a discount to private sector banks, which typically command 2–3x price-to-book, reflecting higher and more consistent ROEs. This suggests that while PSU banks are no longer cheap, they are not overvalued either, provided earnings momentum sustains.
Alok Singh, CIO of Bank of India Mutual Fund, explained the valuation opportunity: "PSU banks are very well placed because they trade at the cheapest valuations within the banking space. Even some of the large PSU banks trade at much lower valuations compared to their peers, primarily because they were not as efficient. As we see now, they are becoming equally efficient. With improvements in business model efficiency and NPAs being managed well, I think the valuation gaps should start converging."
Anshul Saigal, Founder of Saigal Capital, endorsed the positive momentum: "PSU bank results have been actually quite robust in the context of where the markets are and how the expectations were placed. More importantly, the credit costs that many of these banks have exhibited have also been in line or better than expectations. All of this for the valuations that these banks trade at does bode well for the space."
Rahul Sharma of JM Financial Services highlighted specific opportunities: "One can look at the likes of SBI, one can look at the likes of Canara Bank or Bank of Baroda or rather look at PSU bank BeES which is the ETF which essentially takes care of the entire sector in itself."
Among the 12 PSU banks, Central Bank of India was the only one where FII stake declined, dropping marginally to 0.85%, while Punjab & Sind Bank saw foreign ownership remain stable at 0.16%.
Mutual funds were also net buyers in PNB, Central Bank of India, Indian Overseas Bank, UCO Bank and Union Bank of India, though they booked profits in 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 privatization of select banks, which historically has unlocked shareholder value, and a clearer roadmap for building large, globally competitive banking institutions. Potential changes to voting rights and ownership structures could further improve foreign investor participation."
He added that continued government infrastructure spending should support credit growth, while stable interest rates help sustain profitability. However, he cautioned that "performance across PSU banks has not been uniform," pointing out that weaker performers like Punjab & Sind Bank trade at expensive 16.49 times earnings despite poor operational performance.
For retail investors, Srivastava advised: "Investors who are already invested can continue to stay invested, as the improvement in earnings, loan quality, and growth indicates this is not a short-term rally. However, fresh exposure through sectoral funds or ETFs should be avoided due to their cyclical nature, with diversified equity mutual funds offering a more balanced long-term approach."
The transformation of PSU banks from banking system laggards to investor darlings marks one of the most dramatic sector reversals in Indian equities, with institutional money now chasing what was once considered uninvestable.
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
The buying spree was most dramatic at Bank of Maharashtra, where FII ownership more than doubled from 2.35% to 4.92% in the December quarter, while mutual funds quintupled their stake from 1.17% to 5.32%, making it the sectoral favorite among domestic fund managers.
At State Bank of India, the largest bank and the biggest sectoral bet for FIIs in India, foreign ownership climbed from 9.57% to 10.34%. Canara Bank saw FII stakes surge from 11.89% to 14.61%, while Bank of Baroda witnessed a 113 basis point jump to 9.84% and Bank of India rose 158 bps to 5.82%.
The institutional rush comes as PSU bank stocks have delivered eye-popping returns, with Indian Bank rallying 73% over the past year and Bank of India up 68%. Union Bank of India and Canara Bank have each gained over 50%, while SBI has climbed 39% and Bank of Baroda 34%.
"For the first time in over a decade, PSU banks are also growing their loan books faster than private sector banks, indicating that they are regaining market share and customer confidence," said Manish Srivastava, Executive Director at Anand Rathi Wealth Limited.
The turnaround has been driven by sharply improved asset quality, with bad loans declining significantly and balance sheets becoming much stronger. Yet analysts say valuations remain reasonable despite the rally.
"Despite the sharp rally, PSU banks continue to appear reasonably valued when assessed against their improved fundamentals," Srivastava noted. "Strong performers like Indian Bank and Canara Bank have delivered 61% and 55% returns respectively. They still trade at reasonable valuations."
From a relative standpoint, PSU banks still trade at a discount to private sector banks, which typically command 2–3x price-to-book, reflecting higher and more consistent ROEs. This suggests that while PSU banks are no longer cheap, they are not overvalued either, provided earnings momentum sustains.
Alok Singh, CIO of Bank of India Mutual Fund, explained the valuation opportunity: "PSU banks are very well placed because they trade at the cheapest valuations within the banking space. Even some of the large PSU banks trade at much lower valuations compared to their peers, primarily because they were not as efficient. As we see now, they are becoming equally efficient. With improvements in business model efficiency and NPAs being managed well, I think the valuation gaps should start converging."
Anshul Saigal, Founder of Saigal Capital, endorsed the positive momentum: "PSU bank results have been actually quite robust in the context of where the markets are and how the expectations were placed. More importantly, the credit costs that many of these banks have exhibited have also been in line or better than expectations. All of this for the valuations that these banks trade at does bode well for the space."
Rahul Sharma of JM Financial Services highlighted specific opportunities: "One can look at the likes of SBI, one can look at the likes of Canara Bank or Bank of Baroda or rather look at PSU bank BeES which is the ETF which essentially takes care of the entire sector in itself."
Among the 12 PSU banks, Central Bank of India was the only one where FII stake declined, dropping marginally to 0.85%, while Punjab & Sind Bank saw foreign ownership remain stable at 0.16%.
Mutual funds were also net buyers in PNB, Central Bank of India, Indian Overseas Bank, UCO Bank and Union Bank of India, though they booked profits in 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 privatization of select banks, which historically has unlocked shareholder value, and a clearer roadmap for building large, globally competitive banking institutions. Potential changes to voting rights and ownership structures could further improve foreign investor participation."
He added that continued government infrastructure spending should support credit growth, while stable interest rates help sustain profitability. However, he cautioned that "performance across PSU banks has not been uniform," pointing out that weaker performers like Punjab & Sind Bank trade at expensive 16.49 times earnings despite poor operational performance.
For retail investors, Srivastava advised: "Investors who are already invested can continue to stay invested, as the improvement in earnings, loan quality, and growth indicates this is not a short-term rally. However, fresh exposure through sectoral funds or ETFs should be avoided due to their cyclical nature, with diversified equity mutual funds offering a more balanced long-term approach."
The transformation of PSU banks from banking system laggards to investor darlings marks one of the most dramatic sector reversals in Indian equities, with institutional money now chasing what was once considered uninvestable.
(Data: Ritesh Presswala)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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