Over the past 12 months, the Nifty PSU Bank index is up 32% against a 2% decline in the Nifty Private Bank index, driven by a meaningful re-rating as profitability, asset quality and growth all improved together.
“PSU banks have re-rated on the back of real fundamental improvement — but the drivers are cyclical, and at +1SD (1.3x) of their long-term average; hence, further re-rating room is limited,” Nomura’s India banks team wrote. In contrast, private banks have de-rated to about 2 times one‑year forward book, well below the minus 1 standard deviation band of their 10‑year mean of 2.8 times, a correction Nomura calls “overdone”.
Nomura’s case for buying private bank stocks
The first pillar of the call is sustainability of growth. While PSU banks have reversed a multi‑year trend of losing loan market share since September 2024, clocking 14.4% CAGR in advances versus 10.3% for private banks from September 2024 to December 2025, this has not been matched by deposits.
“PSU banks have grown loans faster than deposits since FY23… [and] have consistently underperformed private banks and the industry in deposit growth over the past 5–6 years, resulting in a steady loss of deposit market share,” the brokerage said, noting PSU deposit share has slipped from about 58.6% in March 2024 to 57.8% by December 2025 while private banks now command around 36% of system deposits.
Nomura points out that much of the PSU credit push has been funded by drawing down SLR buffers, with system PSU SLR falling from roughly 25% in FY21–22 to about 20% in Q3 FY26, “approaching close to the statutory floor”, and its scenario analysis suggests most PSU banks have “around two more quarters of liquidity buffer‑supported loan growth before LCR constraints bind” at a 115% comfort level.The second reason is earnings quality. Nomura’s decomposition of return ratios shows PSU banks’ profitability rests heavily on treasury gains and recoveries from written‑off loans, whereas private banks’ ROAs are predominantly driven by core lending and fee income.
Over FY24 to 9MFY26, non‑core income contributed roughly 20–40% of PPOP for PSU banks, compared with just 5–13% for large private banks such as HDFC Bank, Axis Bank and Kotak Mahindra Bank, and added 22–60 basis points to PSU ROAs. “On a core‑RoE basis, private banks lead clearly – headline RoE comparability with PSU banks is misleading,” Nomura cautioned, adding that hardening 10‑year G‑sec yields despite policy rate cuts have already started to “limit MTM gains and make treasury income a headwind rather than a tailwind”.
Third, leverage magnifies downside risk for state‑owned lenders. PSU banks such as SBI, Bank of Baroda, Punjab National Bank, Indian Bank, Canara Bank and Union Bank are running with 12–17 times balance‑sheet leverage, almost double the 6–9 times range for large private peers like HDFC Bank, ICICI Bank, Axis Bank and Kotak.
At these levels, Nomura estimates that a 20‑basis‑point increase in credit costs can knock 240–340 basis points off PSU RoEs versus about 120–180 basis points for private banks, implying “the same earnings shock generates 2–3x the RoE impact” for PSUs.
“This asymmetry in earnings risk is a structural, not cyclical, disadvantage for PSU banks — and it means headline ROE comparability in the current benign environment is misleading,” the report said.
Finally, valuation support now sits with private banks. While PSU banks trade around +1 standard deviation above their 10‑year average at about 1.3 times forward book, effectively “already pricing in a sustained benign earnings environment”, private names are near historic trough multiples despite what Nomura sees as a better growth and profitability outlook over FY26–28.
Among large private lenders, HDFC Bank is at 1.7 times one‑year forward book versus a historical mean of 2.4 times, Axis Bank at 1.6 times against a 1.8 times mean, Kotak at 1.6 times versus 2.4 times, and ICICI Bank at 2.1 times compared with an average of 2.3 times and below recent peaks.
“A combination of attractive valuations and durable earnings quality makes private banks a significantly more compelling investment proposition at this point in the cycle,” Nomura argued, reiterating its preference for large private banks over PSU peers and naming Kotak Mahindra Bank, Axis Bank and ICICI Bank as its top ‘Buy’ picks in the space, followed by SBI and Bank of Baroda within PSUs.