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SumanSpeaks
Capital Markets & Geopolitical Intelligence · Estd 2006
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| Banking · Public Sector Turnaround |
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PSU Banks: Still Priced for Yesterday's Problems
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CRISIL's upgrade of Central Bank of India Ltd to AA+/Stable is a single data point. The sector it sits inside just posted a record ₹1.98 lakh crore profit — and still trades at a fraction of what comparably profitable banks command in New York, Toronto and London.
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We discussed about Central Bank of India Ltd (₹31.07) earlier at SumanSpeaks, and the last few weeks have validated that call. But the more interesting story isn't one bank — it's the twelve-bank cohort it belongs to, and the valuation gap between what these banks now earn and what the market still pays for them.
On August 4, 2026, CRISIL Ratings upgraded Central Bank of India's corporate credit rating to AA+/Stable from AA/Stable. Its Tier-II bonds moved to AA+/Stable in tandem, and its proposed Tier-I bonds were lifted to AA/Stable from AA-/Stable. This is a genuine step up in credit standing, not a routine reaffirmation. The numbers behind it are solid. Q1FY27 standalone PAT rose 13.3% YoY to ₹1,324 crore, net interest income grew 15.7% to ₹3,914 crore, gross NPA improved to 2.60% and net NPA held at ~0.50%. Capital adequacy stands at 18.28%, with Tier-I at 16.54%. FY26 as a whole delivered ₹4,369 crore in net profit, up 15.4% YoY. Management has also mobilised $250 million so far under the RBI's special FCNR(B) swap window, targeting $400 million by end-September, drawing NRI deposits from the Middle East and Australia through its GIFT City unit. CRISIL cited sustained improvement in earnings profile and asset quality, alongside continued support from the Government of India as majority owner, as the basis for the upgrade.
Central Bank's turnaround is not an isolated event. India's 12 (twelve) public sector banks together posted a record aggregate net profit of ₹1.98 lakh crore for FY26, up 11.1% YoY from roughly ₹1.78 lakh crore in FY25 — the fourth consecutive year of sector-wide profitability, per the Finance Ministry. Asset quality has moved in lockstep. Gross NPAs across PSBs fell to a historic low of 1.93% as of March 2026, down from 2.58% a year earlier; net NPAs dropped to 0.39%, also a record low. Every PSB now maintains provision coverage above 90%. The slippage ratio — how fast new loans turn bad — eased to just 0.7% for the year, and total recoveries, including from written-off accounts, came to ₹86,971 crore. Aggregate operating profit for the cohort touched ₹3.21 lakh crore, with capital adequacy at 16.6%. PSU Banking Sector — FY26 Scorecard
The Nifty PSU Bank index has now beaten the Nifty 50 for five straight calendar years — including a 31% gain in CY2025 against the Nifty's 10.2%. That is not noise. That is a sector that has been quietly re-rating in plain sight while still carrying the reputational baggage of its 2015-2020 NPA years.
None of this happened by accident. The Government of India spent the last decade recapitalising PSBs, pushing them through the 2020 mega-mergers — PNB absorbing Oriental Bank and United Bank, Canara taking over Syndicate Bank, Indian Bank merging with Allahabad Bank — and backing the Insolvency and Bankruptcy Code as a real recovery mechanism for bad loans. Delhi's posture has now shifted from crisis management to value-unlocking. The Union Budget for FY27 has set a ₹80,000 crore target for disinvestment and asset monetisation — a sharp step-up from the ₹34,000 crore revised estimate for FY26 and roughly ₹17,000-20,000 crore actually realised in FY25. Five PSBs — Bank of Maharashtra, Indian Overseas Bank, UCO Bank, Central Bank of India and Punjab & Sind Bank — have been earmarked for further stake dilution via Offer for Sale, largely to meet minimum public shareholding norms. IDBI Bank's strategic privatisation is in its final stage, with financial bids already received. There has also been policy discussion around raising the foreign investment cap in PSU banks beyond the current 20% ceiling, though this remains at the proposal stage rather than a confirmed decision. The signal to international readers: the state is no longer simply propping these banks up. It is actively trying to monetise the value it helped rebuild, which — if executed — tends to force the market to price these institutions more honestly.
This is the part that should interest an international reader most. Per Motilal Oswal's coverage, most PSU banks currently trade at 0.8-1.0x forward price-to-book and 5-7x FY27E earnings — even as several of the larger names deliver return ratios in the mid-to-high teens. Compare that with what investors pay for comparable profitability elsewhere: Price-to-Book: India's PSU Banks Vs Global Peers
Two things stand out here, and we want to be precise about both. First, the Canadian Big Six trade at genuinely rich multiples — none below 1x book — reflecting an oligopoly structure that Indian PSU banks don't enjoy, so that comparison flatters India less than it first appears. Second, and more usefully: US majors like JPMorgan and RBC command 2.4x book on ROEs broadly comparable to what several large Indian PSU banks now deliver, while Indian PSU banks sit at well under half that multiple. Even Barclays — a bank that spent years under a governance and restructuring cloud — has closed to within touching distance of book value, a level several Indian PSBs still haven't reached despite record profitability. That is the disconnect worth sitting with, not a uniform "everyone abroad is 2x, India is 1x" story.
Central Bank of India Ltd is a useful lens on the broader story precisely because it was, until recently, among the weakest names in the PSU cohort — it exited the RBI's Prompt Corrective Action framework only a few years ago. Its Q1FY27 numbers show a bank still working through the last mile of that recovery: operating profit actually dipped 5.1% YoY even as PAT rose, because provisions fell sharply and tax outgo dropped. Cost-to-income remains elevated near 55%, and three-year average ROE, per Screener data, sits closer to 10.8% — below the sector's stronger performers. Management's own stated target is to cross ₹5,000 crore in annual profit by FY27, up from ₹4,369 crore in FY26 — a credible extrapolation of the current trend, though it remains a target rather than a locked-in number. What Central Bank's story actually demonstrates isn't spectacular performance; it's that even the sector's laggards are now investment-grade, profitable, and improving — which is precisely what makes the sector-wide re-rating case more durable than a story built on just the two or three strongest PSU names. What Deserves A Closer Watch
The rally has already run — the Nifty PSU Bank index is up over 30% for a fifth straight year, so a chunk of the re-rating case is already in the price. Treasury gains, which flattered several PSBs' profits over FY25-26, will not repeat at the same scale if bond yields stabilise. The transition to Expected Credit Loss (ECL)-based provisioning norms could front-load provisioning costs for some banks when it takes effect. Moreover, the government ownership remains the double-edged sword it has always been: a credible backstop in downturns, but also a source of slower decision-making and periodic dilution overhang as OFS rounds proceed. And returns vary widely within the cohort — Central Bank's own ROE trails the stronger names, a reminder that "PSU bank" is not one uniform trade. The SumanSpeaks Verdict: The PSU Banking Sector
CRISIL's upgrade of one bank is a small, verifiable data point. The real headline is the ₹1.98 lakh crore of sector-wide profit sitting behind it — and the market hasn't caught up to that yet. PSU banks still trade at a steep discount to book value next to global peers with comparable returns, and that gap has yet to close. |
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This article is published by SumanSpeaks for general informational and educational purposes only. The author has over 25 years of capital markets experience. This is not a recommendation to buy, sell, or hold any security. PSU bank stocks, including Central Bank of India, carry sector-specific risks such as government ownership overhang, cyclicality in treasury income, and evolving provisioning norms; past performance, including the multi-year outperformance cited here, is not indicative of future returns. All data is sourced from public regulatory filings, the Ministry of Finance, CRISIL, and credible financial media as of August 2026. International valuation comparisons are approximate and change daily with market prices; readers should verify current figures before acting. Readers must conduct independent due diligence before making any investment decision. |
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For personalized stock market insights and guidance, feel free to reach out at: sumanm2007s@gmail.com | suman2005s@rediffmail.com |
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