PSU Bank Stocks Extend Losing Streak as Investors Turn Cautious Ahead of 2026
Public sector bank (PSU Bank) stocks slipped for the fourth consecutive session on December 29, reflecting growing investor caution after a strong run-up earlier in the year. The sustained decline comes amid profit booking, valuation consolidation, and a wait-and-watch approach ahead of key earnings updates and policy signals.
The weakness pushed the Nifty PSU Bank index down around 0.3 percent to 8,263.55 by late morning trade, extending a phase of consolidation after the sector emerged as one of the top performers in 2025. Market participants said the recent correction does not necessarily signal a reversal of fundamentals, but rather a pause following a sharp re-rating.
Recent Decline Reflects Consolidation After a Strong Rally
PSU bank stocks have delivered significant gains over the past year, supported by improving asset quality, lower non-performing assets (NPAs), and stronger balance sheets. However, analysts note that after such a rally, some consolidation is natural.
Siddharth Maurya, Founder & Managing Director at Vibhavangal Anukulakara, said near-term volatility is likely to persist. “Although asset quality ratios, capital adequacy and balance sheet strength of PSU banks have improved meaningfully, valuations have started consolidating after the recent rally,” he said.
He added that the next phase for the sector is unlikely to be uniform. “The coming times would be stock-specific, with earnings performance and policy cues playing important roles in determining the course,” Maurya noted, suggesting that broad-based momentum may give way to selective moves.
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Why PSU Banks Outperformed in 2025
Market experts point out that the recent correction should be viewed in the context of the sector’s strong turnaround over the past few years. According to Pravesh Gour, Senior Technical Analyst at Swastika Investmart, PSU banks emerged as leaders in 2025 due to a rare convergence of supportive factors.
“PSU bank stocks have emerged as clear leaders, driven by improving asset quality, supportive macro conditions and stronger profitability,” Gour said. He highlighted that gross and net NPAs across most public sector banks have declined to multi-year lows, significantly reducing credit costs.
Key factors behind the sector’s earlier outperformance include:
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Cleaner balance sheets after years of NPA resolution
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Improved return on assets (RoA) and return on equity (RoE)
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Healthy credit demand from infrastructure, manufacturing, MSMEs and retail segments
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Better capital adequacy, reducing the need for frequent equity dilution
These improvements have restored investor confidence in a sector that had struggled with governance issues and weak earnings visibility for over a decade.
Valuation Re-Rating Now Faces Resistance
Another major driver of PSU bank gains has been valuation re-rating. For years, public sector banks traded at deep discounts to private peers due to concerns over asset quality and operational efficiency. That gap narrowed significantly in 2025 as earnings visibility improved.
“For a long period, PSU banks were priced cheaply. As earnings stabilised and governance improved, investors began to reprice these stocks upward,” Gour said. He added that government support, digitisation initiatives and policy-led credit growth further strengthened sentiment.
However, analysts caution that a meaningful part of this re-rating may already be reflected in current prices. As a result, future returns may be more moderate compared to the sharp gains seen earlier, especially if earnings growth does not exceed expectations.
Top PSU Bank Losers Highlight Selective Profit Booking
The recent decline has not been uniform across the sector, underscoring the shift toward stock-specific action. On December 29, Central Bank of India emerged as the top loser on the Nifty PSU Bank index, falling over 1 percent to around ₹36.47.
Other lenders such as Union Bank of India, Punjab National Bank (PNB), Punjab & Sind Bank, Bank of India and UCO Bank also slipped by about 1 percent each. Large names including State Bank of India (SBI), Bank of Baroda, Indian Bank and Indian Overseas Bank traded marginally lower, reflecting cautious sentiment even in relatively stronger franchises.
In contrast, Canara Bank and Bank of Maharashtra bucked the trend, managing to trade in the green with modest gains, indicating selective buying interest based on individual fundamentals.
What Should Investors Do Heading Into 2026?
Analysts broadly agree that PSU banks remain a structurally improved sector, but expectations need recalibration. While the long-term turnaround story remains intact, near-term volatility and consolidation are likely.
On the positive side:
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Balance sheets are stronger than in previous cycles
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Asset quality trends remain stable
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PSU banks benefit directly from government-led capital expenditure
On the risk side:
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Valuations are no longer deeply discounted
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Earnings growth may normalise
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Stock-specific execution risks could widen performance gaps
“Stock selection becomes critical,” Gour said, advising investors to focus on banks with consistent earnings growth, strong capital buffers and disciplined lending practices. He added that PSU banks now represent a blend of value and growth, but returns are likely to be steadier rather than spectacular.
Bottom Line: Recovery Intact, But Selectivity Is Key
The four-day decline in PSU bank stocks reflects consolidation rather than a breakdown in fundamentals. As the sector transitions from recovery to stability, investor focus is shifting from broad sector bets to individual bank performance.
For long-term investors, select PSU banks may still offer attractive opportunities, provided expectations remain realistic. As Maurya summed up, the road ahead will be “stock-specific,” shaped by earnings delivery, policy cues and the ability of banks to sustain profitability in a more competitive environment heading into 2026.
