PNB, SBI, Bank of Baroda: 3 PSU banking stock picks ahead of Q2 results season

Public sector banks (PSBs) are expected to report healthy loan growth and only moderate pressure on net interest margins (NIM) in the September quarter, according to Nuvama. Bank of Baroda has guided for strong sequential loan growth of 4 per cent or more, while Punjab National Bank (PNB), Canara Bank, and Indian Bank have projected growth of around 2.5 per cent quarter-on-quarter. Union Bank is likely to grow at a slower pace than the sector.

On margins, PNB expects NIM to remain flat sequentially. BoB anticipates stable reported NIM, although core NIM could decline by 7 basis points. Indian Bank is likely to see a fall of less than 10 basis points, while Union Bank may report a drop of 6 basis points. Canara Bank could face higher pressure on NIM due to its lower CASA ratio, while State Bank of India (SBI( is expected to post about 3 per cent loan growth with a NIM decline of around 5 basis points. Nuvama Institutional Equities continued to prefer BoB, SBI, and PNB, which are likely to deliver relatively strong return on assets (RoA).

Most of the loan growth in PSU banks is expected to come from retail, agriculture, and MSME segments. Corporate lending has slowed due to disintermediation by mutual funds and capital markets, though select AAA-rated corporates have reported growth.

The sector’s net interest income (NII) remains under pressure from lower interest rates and slower growth. State-owned banks reported flat to negative year-on-year NII growth in Q1FY26, while most private banks, apart from HDFC Bank and ICICI Bank, posted only low single-digit growth.

Asset quality is likely to remain healthy, with no major slippages expected. SBI, BoB, and Indian Bank may see reduced slippages, while others are likely to remain flat. Key PSU banks are expected to maintain RoA above 1 per cent, supported by core income, and in PNB’s case, a lower tax rate. Union Bank and Canara Bank, however, have a higher share of written-off recoveries relative to other state banks.

Over the past six months, the PSU Bank Index has outperformed the private bank index by 15 per cent, driven by strong loan growth and robust asset quality. Nuvama sees no immediate implementation of expected credit loss provisioning and notes that the government currently has no plans for further PSU bank mergers.