New Delhi: Public Sector Banks (PSBs) are entering a new era of profitability, with their return on assets (RoA) surpassing 1 per cent, driven by stronger balance sheets, improved asset quality, and steady credit growth, according to a recent report by Motilal Oswal.
The report highlighted that PSB sector profitability has reached a record Rs 1.5 lakh crore, with aggregate earnings of the banks under coverage projected to grow at a 14 per cent compound annual growth rate (CAGR) from FY26 to FY28.
“While net interest margin (NIM) pressures may affect the near-term outlook, rising fee income, gradual moderation in cost ratios, and healthy coverage levels (PCR ~79 per cent) are expected to keep RoA stable at 1.0–1.1 per cent,” the report said.
PSBs’ momentum has also been supported by stronger deposit franchises, conservative credit-deposit ratios, and steady growth in the Retail, Agriculture, and MSME (RAM) segments. For the first time in 15 years, PSBs outpaced private banks in loan growth during FY25, registering 12 per cent growth compared to 10 per cent by private lenders.
“PSBs’ market capitalization has surged nearly fivefold since FY20, yet valuations remain reasonable, with sector RoE stable at 18–19 per cent and RoA at around 1 per cent,” the report noted.
It emphasized that the recent gains are sustainable: “The recovery of RoA to 1 per cent is not a one-off event but a return to form for PSBs. With margins expected to recover in the second half of FY26 and asset quality remaining stable, PSBs are well-positioned to deliver consistent returns in the coming years.”
The report also suggested that this transformation could lead to a gradual re-rating of the PSB sector.
