Strong Q2FY27 business updates lift public sector lenders as investors track advances, deposits, asset quality and earnings growth

Public sector bank stocks were in strong demand on Monday, with several lenders gaining between 2 per cent and 4 per cent after their September-quarter business updates indicated healthy growth in advances and deposits.

The Nifty PSU Bank index was the top-performing sectoral index during the morning session, rising around 2 per cent at 10:23 AM, compared with a 0.44 per cent gain in the Nifty 50.

Bank of India, Punjab National Bank (PNB), Indian Overseas Bank (IOB), Indian Bank, Bank of Baroda, UCO Bank and Bank of Maharashtra advanced between 2 per cent and 4 per cent. Canara Bank, State Bank of India, Central Bank of India and Union Bank of India also traded higher.

The latest gains reflect growing investor interest in the improving operating performance of PSU banks, particularly their ability to grow loans while maintaining deposit mobilisation and asset quality.

Indian Bank Reports Strong Q2 Business Growth

Indian Bank reported steady business expansion during Q2FY27, with gross advances rising to ₹7.23 trillion.

Advances grew 16.6 per cent year-on-year and 5.5 per cent sequentially, indicating continued credit demand across its key customer segments.

The bank's Retail, Agriculture and MSME (RAM) portfolio stood at ₹4.43 trillion, representing growth of 17.8 per cent year-on-year and 6.2 per cent quarter-on-quarter.

The faster expansion of RAM advances is significant because these segments remain important drivers of diversification and profitability for Indian public sector lenders.

Deposit Growth Remains an Important Monitorable

Indian Bank's total deposits increased to ₹8.73 trillion, up 12.4 per cent year-on-year and 3.4 per cent sequentially.

Savings deposits grew 10.8 per cent year-on-year, while current account deposits increased 27.5 per cent. As a result, the bank's CASA ratio stood at 39.3 per cent, compared with 39.7 per cent in the previous quarter.

The strong growth in current account deposits provides some support to the liability mix and could help the bank manage funding costs.

However, deposit growth remains slower than advance growth, making further deposit mobilisation an important focus area for the lender.

Bank of Baroda Shows Strong Advance Growth

Bank of Baroda also reported healthy growth during the September quarter.

Global advances increased to ₹15.12 trillion, rising 18.3 per cent year-on-year and 6.7 per cent sequentially.

Domestic advances stood at ₹11.87 trillion, up 13.5 per cent year-on-year and 3.2 per cent quarter-on-quarter.

Domestic retail advances remained particularly strong, reaching ₹3.24 trillion after growing 18.7 per cent year-on-year and 4.6 per cent sequentially.

The continued expansion in retail lending is helping public sector banks diversify their loan books beyond traditional corporate and infrastructure lending.

Deposit Mobilisation Improves at Bank of Baroda

Deposit mobilisation was one of the key positives in Bank of Baroda's Q2 update.

Both global and domestic deposits grew faster than advances on a sequential basis. This helped improve the bank's domestic credit-deposit ratio.

The domestic CD ratio moderated to 79.8 per cent from 83.3 per cent, providing greater balance-sheet headroom.

A lower CD ratio gives the bank more flexibility to pursue loan growth without immediately facing the same degree of pressure on its deposit base.

ICICI Securities noted that while domestic credit growth remained relatively moderate, retail lending continued to grow faster than the overall domestic loan book.

Bank of India Posts Double-Digit Growth

Bank of India was among the leading gainers in Monday's session after reporting strong growth across its global and domestic businesses.

The bank's global business increased 21 per cent year-on-year to ₹18.9 trillion, while domestic business grew 23 per cent to ₹6 trillion.

Global deposits increased 21.6 per cent year-on-year to ₹10.4 trillion. Domestic deposits were even stronger, rising 23 per cent to ₹9 trillion.

The broad-based growth in deposits and advances suggests that Bank of India's business momentum remained strong during the quarter.

PSU Bank Index Outperforms Broader Market

The strong performance of individual lenders pushed the Nifty PSU Bank index higher by around 2 per cent during morning trade.

The index's outperformance against the Nifty 50 indicates that investors are increasingly focusing on the improving fundamentals of public sector lenders.

PSU banks have undergone a significant improvement in asset quality over the past few years, while capital positions have also strengthened.

The market is now increasingly looking for the next phase of growth, particularly in retail, agriculture, MSME and other granular lending segments.

Earnings Growth Could Remain Strong

Motilal Oswal Financial Services (MOFSL), in its Q2FY27 results preview, expects PSU banks' profit after tax to rise 27 per cent year-on-year and 19 per cent sequentially.

The brokerage expects earnings to benefit from strong business growth and, in some cases, gains from stake sales.

Net interest income is estimated to grow 10.8 per cent year-on-year and 1.6 per cent quarter-on-quarter, while net interest margins are expected to remain relatively resilient.

The brokerage also expects PSU banks to maintain benign credit costs, supported by a stable asset-quality environment.

Asset Quality Outlook Remains Stable

One of the most important changes in the PSU banking story has been the improvement in asset quality.

After years of elevated stressed assets and high provisions, public sector banks have significantly strengthened their balance sheets.

The current environment of stable asset quality is allowing lenders to focus more aggressively on growth.

MOFSL expects the asset-quality outlook for PSU banks to remain stable, although recoveries from the write-off pool are expected to decline.

The moderation in recoveries means banks will need to rely increasingly on regular business profitability rather than exceptional recovery gains to drive earnings.

Treasury Gains May Remain Muted

While operating performance remains positive, treasury income could provide less support to PSU bank earnings.

MOFSL expects treasury gains to remain muted because bond yields have remained elevated.

This places greater importance on core banking performance, including loan growth, deposit mobilisation, net interest income and fee income.

A shift toward stronger core operating earnings would be constructive for the long-term quality of PSU bank profitability.

Can PSU Banks Sustain the Rally?

The recent rally reflects optimism around the September-quarter business updates, but the sustainability of the move will depend on the upcoming financial results.

Investors will closely watch whether strong advance growth translates into higher net interest income and whether banks can maintain margins despite competitive pressure for deposits.

Deposit growth will remain particularly important because several lenders are reporting loan growth that is faster than deposits.

At the same time, stable asset quality and controlled credit costs could provide support to earnings.

Key Metrics Investors Should Watch

The upcoming Q2 results will provide greater clarity on several critical indicators:

• Loan and advance growth

• Deposit mobilisation

• CASA ratio

• Credit-deposit ratio

• Net interest margin

• Net interest income growth

• Slippages and credit costs

• Gross and net NPA levels

• Recoveries and write-offs

• Fee income

• Capital adequacy

• Return on assets and equity

The performance of these indicators will determine whether the recent PSU bank rally develops into a broader re-rating or remains a short-term reaction to business updates.

Market Outlook

PSU banks have entered the September-quarter results season with strong operating momentum. Indian Bank, Bank of Baroda and Bank of India have reported healthy growth in advances and deposits, while the broader sector continues to benefit from improving asset quality and stronger balance sheets.

MOFSL's expectation of 27 per cent year-on-year PAT growth for PSU banks in Q2FY27 adds to the positive earnings narrative. However, elevated bond yields could limit treasury gains, making core banking performance increasingly important.

For investors, the next phase of the PSU bank story will depend on whether strong credit growth can be matched by sustainable deposit mobilisation, stable margins and controlled credit costs.

With the Nifty PSU Bank index outperforming the broader market, the sector is clearly back on investors' radar. The key question now is whether Q2 earnings can provide enough fundamental support to turn the current momentum into a sustained PSU banking re-rating.