After a 14-fold jump in profits for the banking sector in 5 years, can the rally hold in FY26?

India’s banking sector has shown a sharp rise in profits over the last few years, with both private and public sector banks (PSU banks) reporting strong growth. The data available from Ace Equity highlights how the Indian banking industry, with 28 listed private banks and 13 PSU banks, has transformed into a profit powerhouse.

In FY25, the combined profit after tax (PAT) of all 41 banks stood at Rs 4.02 lakh crore, up from Rs 3.45 lakh crore in FY24 and just Rs 28,642 crore in FY20. This shows how strongly the sector has recovered and expanded in recent years. The consistent rise in PAT indicates better lending practices, healthier balance sheets, and stronger earnings across both private and public players.

Private banks continued to lead in terms of profitability. Their combined PAT increased to Rs 2.11 lakh crore in FY25, compared to Rs 1.94 lakh crore in FY24 and Rs 30,270 crore in FY20. Over five years, the profits of private banks grew nearly seven times, reflecting their stronger balance sheets and steady growth.

PSU banks also staged a remarkable turnaround. From a net loss of Rs 1,629 crore in FY20, they posted a profit of Rs 1.91 lakh crore in FY25. Their profits more than doubled from FY22 levels (Rs 72,535 crore).

Most profitable banks:

Among the top performers in FY25, the State Bank of India (SBI) reported the highest profit after tax (PAT) at Rs 79,017 crore and stood as the country’s largest and most profitable bank.

SBI is followed by HDFC Bank with a profit of Rs 73,440 crore, while ICICI Bank posted Rs 54,419 crore, making them the second and third most profitable banks. Other major private banks such as Axis Bank (Rs 28,112 crore) and Kotak Mahindra Bank (Rs 21,946 crore) also contributed strongly to sector earnings.

On the public sector side, Bank of Baroda stood out with a PAT of Rs 20,459 crore, while Union Bank of India (Rs 17,921 crore), Punjab National Bank (Rs 17,440 crore), Canara Bank (Rs 17,336 crore), and Indian Bank (Rs 10,995 crore) completed the list of the top 10 most profitable Indian Banks.

Recent quarterly performance:

In the first quarter of FY26, banks reported a mixed performance. The combined profit after tax (PAT) of all banks stood at Rs 95,052 crore, down 3% year-on-year and 7% quarter-on-quarter. Private banks saw their profits decline by 8% compared to last year and 2% from the previous quarter, with a total PAT of Rs 49,958 crore. In contrast, public sector banks recorded a 3% year-on-year rise in profits to Rs 45,094 crore, although their profits dropped 11% compared to the last quarter.

What to expect in the coming years:

“PSU banks outperformed private banks in terms of loan growth and gained share in FY25 (home loans and auto loans). Asset quality was largely similar for both (similar new NPA formation and credit cost). Headline PAT growth was higher for PSU banks, driven by non-core recoveries and treasury gains. While PSU banks are growing their loan book faster, it is coming at the cost of NIMs. Private Banks have a strong focus on profitable growth,” said Venkatesh Balasubramaniam, MD & Head of Research, JM Financial Institutional Securities Ltd.

He further added, For PSU banks, we expect PAT to decline 6% YoY in FY26 v/s flat PAT YoY for private banks. Even in FY27, we expect PAT growth of only 4% for PSU banks v/s 16% YoY for private banks. Recoveries, which were aiding PAT for PSU banks, should come down materially from FY26. Employee expenses should go up materially during FY26-28. PSU banks are still aggressive in MSME lending v/s private banks, which should have negative implications for asset quality.

“The only argument in favour of PSU banks is cheap valuation, but it is cheap because of the above reasons. It is going to be difficult to achieve even 1% RoA for the overall PSU pack. SBI is relatively better placed in the pack, but we have less conviction in the rest of the names”, Balasubramaniam said.