PSU Bank Stocks Rally 2% as Strong Q2 Results Spark Fresh Investor Confidence

Indian markets kicked off November on a cautiously optimistic note, with the Sensex and Nifty closing nearly flat on November 3, 2025. But beneath the surface, one sector stood out in bold green—public sector unit (PSU) banks. The Nifty PSU Bank index surged over 2%, driven by stellar quarterly results from Bank of Baroda and Canara Bank, along with fresh policy momentum that has investors asking: Are PSU banks finally back in the game?

For retail investors who have long debated whether to bet on old-economy PSU lenders or stick with their private-sector counterparts, Monday’s action offered a clear answer—at least for the short term. Here’s what happened, why it matters, and what you should watch next.

Market Snapshot: Flat Indices, But Banks Steal the Show

The Indian equity benchmarks ended November 3 with marginal gains. The BSE Sensex closed at 83,978.49, up just 39.78 points or 0.05%, while the Nifty 50 settled at 25,763.35, gaining 41.25 points or 0.16%. Despite the subdued headline numbers, mid-cap and small-cap stocks outperformed, with the BSE Midcap index rising 0.6% and the Smallcap index adding 0.7%.

Sectorally, the action was concentrated in pharma, telecom, realty, and PSU banks—all of which gained between 1-2%. On the flip side, IT and FMCG stocks lagged, reflecting ongoing caution around global growth and rate cut expectations.

Among individual stocks, Shriram Finance led the Nifty 50 gainers with a spectacular 6.18% jump, followed by Tata Consumer Products (+2.62%), Apollo Hospitals (+2%), and Mahindra & Mahindra (+1.89%). Meanwhile, Maruti Suzuki was the biggest loser, falling 3.41% despite posting strong October sales numbers.

But the real story of the day belonged to PSU banks, which extended their winning streak for the seventh session in a row.

Why PSU Bank Stocks Rallied Today

The Nifty PSU Bank index jumped 2.19% to close at 8,363.2, hitting a fresh 52-week high. All 12 constituents of the index traded in the green, with Bank of Baroda and Canara Bank leading the charge after announcing their second-quarter earnings over the weekend.

1. Bank of Baroda’s Strong Q2 Performance

Bank of Baroda shares surged 4.56% to Rs 291.10, touching a record high during intraday trade. The lender reported a better-than-expected July–September performance, with its net interest margin (NIM) rising 5 basis points to 2.96% despite the Reserve Bank of India’s 100-basis-point repo rate cut in June.

While the bank’s net profit declined 8% year-on-year to Rs 4,809 crore, it rose 6% sequentially on lower provisions. More importantly, asset quality improved sharply. Gross non-performing assets (NPAs) fell to 2.16% from 2.50% a year ago, and net NPAs dropped to 0.57% from 0.60%.

Multiple brokerages turned more bullish on the stock post-earnings:

• HSBC reiterated its buy rating and raised the target price to Rs 340, citing broad-based loan growth, NIM expansion, and strong asset quality.
• Citi maintained its buy rating with a Rs 350 target, noting an 8% profit beat and healthy corporate loan traction.
• Nomura upgraded the stock to buy and lifted its target to Rs 320, flagging attractive valuations.
• CLSA reiterated its outperform rating with a Rs 325 target, pointing to resilient asset quality despite softer fee income and lower CASA.

2. Canara Bank’s Solid Numbers

Canara Bank gained 1.82% to Rs 139.49 after reporting sequential improvement in gross and net NPAs in the September quarter. Net profit grew 19% year-on-year to Rs 4,774 crore, while global advances and deposits climbed 13.74% and 13.40%, respectively.

The improvement in asset quality, combined with healthy credit growth, reinforced investor confidence that PSU banks are emerging stronger from their asset quality cleanup phase of the past few years.

3. Policy Support and Consolidation Buzz

Beyond quarterly results, investor sentiment in state-run lenders was further boosted by two major policy-driven triggers:

• Higher FDI Limit Proposal: Reports indicated that the government may allow up to 49% direct foreign investment in PSU banks—more than double the current 20% cap. This move would narrow the gap with private banks, where FDI is permitted up to 74%, and could significantly enhance capital-raising avenues for public-sector lenders.

• Merger Speculation: The government is reportedly evaluating a merger between Union Bank of India and Bank of India, a move that could create the second-largest PSU lender after SBI and support broader consolidation efforts in the sector.

These developments, while still in the discussion stage, added a layer of structural optimism to the earnings-driven rally.

4. Shriram Finance Joins the Party

While not a PSU bank, Shriram Finance—a leading non-banking financial company (NBFC)—also contributed to the financial sector’s strong showing. The stock jumped 6% to Rs 795.15 after reporting a 7% year-on-year increase in consolidated net profit to Rs 2,314 crore for Q2FY26. The company’s total income rose 18% to Rs 11,921 crore, and asset quality improved, with gross NPAs declining to 4.57% from 5.32%.

Leading brokerages maintained positive ratings on Shriram Finance, with target prices ranging from Rs 750 to Rs 870, citing lower credit costs, improving margins, and steady assets under management (AUM) growth.

What Investors Should Watch Next

While Monday’s rally was impressive, the big question for retail investors is: Can PSU banks sustain this momentum, or is this just a short-term earnings pop?

Here are the key factors to watch:

1. Q2 Earnings from Other PSU Banks

State Bank of India (SBI), the country’s largest lender, is expected to report its Q2 results soon. Any signs of margin compression, slower loan growth, or rising credit costs could weigh on the broader PSU bank index. On the other hand, a strong showing from SBI would validate the sector’s turnaround story.

2. FII and DII Flows

Foreign institutional investors (FIIs) sold Rs 6,769 crore in Indian equities on October 31, 2025, while domestic institutional investors (DIIs) bought Rs 7,068 crore, cushioning the fall. Historically, PSU banks tend to perform well when DIIs are active buyers, but sustained FII selling remains a concern.

3. Policy Clarity on FDI and Mergers

The government’s proposal to raise the FDI limit in PSU banks to 49% is still under discussion between the finance ministry and the Reserve Bank of India. Similarly, the rumored Union Bank-Bank of India merger has not been officially confirmed. Any concrete announcements on either front could trigger fresh buying interest.

4. Interest Rate Trajectory

PSU banks are sensitive to interest rate movements. With the RBI holding rates steady and global central banks, including the US Federal Reserve, turning less dovish, the outlook for NIMs remains uncertain. Investors should monitor RBI’s upcoming monetary policy meetings for any signals on rate cuts or liquidity measures.

5. Asset Quality Trends

While Bank of Baroda and Canara Bank showed improving asset quality, the broader test will be whether other PSU lenders can sustain low NPA levels amid a slowing economy and rising household debt. Any uptick in slippages—especially in retail or MSME segments—could dampen sentiment.

The Bigger Picture: Are PSU Banks Undervalued?

PSU banks have long traded at a discount to their private-sector peers, primarily due to concerns around governance, slower loan growth, and weaker asset quality. However, the tide appears to be turning.

Over the past week, the Nifty PSU Bank index surged nearly 7%, reflecting growing optimism about policy support and financial strength. FIIs increased their stakes in almost every major PSU bank during the September 2025 quarter, with Bank of Baroda, Canara Bank, and SBI seeing notable upticks in foreign ownership.

Analysts at Kotak Mahindra Asset Management have highlighted that “within the PSU banks, there are specific picks where some of the larger PSU banks are better placed to benefit both from credit growth picking up, especially on the retail front, as well as margins bottoming out.”

However, not everyone is convinced that this momentum will hold. Seshadri Sen of Emkay Global cautioned that “PSU banks are set for a strong H2 FY26, but the momentum is set to fizzle out in FY27E,” suggesting that investors should temper their expectations for long-term gains.

What Retail Investors Should Do

For beginner-to-intermediate retail investors, here’s a simple framework to approach PSU bank stocks:

If You’re a Long-Term Investor:

• Look for PSU banks with improving asset quality, rising NIMs, and strong retail liability franchises.
• Consider stocks like Bank of Baroda, Canara Bank, and SBI, which are benefiting from structural tailwinds like credit growth and digital transformation.
• Don’t chase momentum—use any short-term corrections as opportunities to accumulate quality names at reasonable valuations.

If You’re a Short-Term Trader:

• Monitor key support and resistance levels. For the Nifty PSU Bank index, support is seen around 8,100, while resistance lies at 8,400-8,500.
• Watch for profit-booking after the recent rally—markets rarely move in a straight line.
• Keep an eye on FII-DII flows, as sustained FII selling could cap further upside.

If You’re Risk-Averse:

• Consider diversifying your financial sector exposure by including both PSU and private banks in your portfolio.
• Alternatively, look at mutual funds or ETFs that track the Nifty Bank or Nifty PSU Bank indices for a more balanced approach.

Disclaimer

This article is only for information purposes and is not investment advice. Before investing, do your own research or consult a qualified financial advisor. Stock markets are subject to risks, and past performance is not indicative of future results.