PSU Banks Rally: Is This the Start of a New Bull Run After Q2 Surge?

In the second quarter of the 2026 financial year, several **public sector banks (PSUs) **reported a sharp increase in their profit figures. Q2FY26 is viewed as a quarter of recoveries, lower provisioning requirements, and one-off treasury gains, which collectively improved headline earnings. The market also reacted positively by lifting the Nifty PSU Bank index and prompting analyst upgrades. However, for investors, the question now is whether this one quarter signals a durable bull phase.

Financial Results of Key Public Sector Banks

Recently, several public sector banks have announced their Q2 FY26 results. Let's start with Union Bank, whose net profit for the period stood at ₹4,249, which is a 3.25% increase on a quarter-on-quarter (QoQ) basis. The bank’s interest income stood at ₹26,650 crore, while operating profit reached ₹6,814 crore. Return on Assets (RoA) improved to 1.16% and Return on Equity (RoE) rose to 15.08%.

Similarly, the Bank of India's net profit for the period was ₹2,575.58 crore, representing a 40.7% quarter-over-quarter (QoQ) increase and a 6.4% year-over-year (YoY) increase. Total income rose to ₹20,739.87 crore, a marginal 0.3% QoQ and 3.7% YoY increase, while expenses grew 1.7% QoQ and 6.9% YoY to ₹16,887.39 crore. The bank has managed to reduce its provisions and contingencies to ₹491.66 crore, down 55.8% QoQ, which supported the profit surge.

Bank of Baroda showed mixed results. It posted a standalone net profit of ₹4,809 crore, a 8.19% decline on a YoY basis. The drop was due to a 32% YoY decline in non-interest income to ₹3,515 crore. However, net interest income (NII) rose 4.5% sequentially to ₹11,954 crore, supported by stable net interest margins (NIMs).

The operating expenses increased 7.7% YoY to ₹7,893 crore. The bank made a ₹400 crore floating provision ahead of the expected credit loss (ECL) framework transition. Asset quality improved, with the gross NPA ratio falling 34 bps YoY to 2.16% and net NPA at 0.43%.

What Has Helped PSU Banks Perform Well?

Here are some factors that contributed to the impressive performance of PSU banks.

Credit and Deposit Growth

The primary reason was strong growth in credit and deposits. Canara Bank reported a 13.74% YoY growth in advances and a 13.4% YoY expansion in deposits. Bank of Baroda’s advances were up by 11.9%, and deposits grew by 9.3%. Similarly, the Bank of India’s advances increased by 14%, and deposits rose by 10.08%.

Improved Margins

While net interest margins (NIMs) narrowed for some PSU banks due to a combination of rising deposit costs and delayed transmission of lending rate reductions, several factors allowed banks to manage margins better than expected. For example, Bank of Baroda’s NIM, though declining by 15 basis points to 2.96% YoY, expanded sequentially by 5 bps due to prudent lending and stable asset-liability management.

Government Regulations

PSU banks directly benefited from two major regulatory policy developments. First, SEBI’s amendment of Nifty Bank index rules mandated a minimum of 14 constituents (up from 12), capped the maximum stock weight at 20% (down from 33%), and ensured the top three stocks together can’t exceed 45% of the index (down from 62%).

Second, the Indian government started the process to revise the FDI (Foreign Direct Investment) limit for public sector banks from 20% to 49%.

Improved Capital Adequacy Ratios

PSU bank performance was supported by capital adequacy ratios (CAR/CRAR) that were improved due to internal accruals, strategic capital-raising, and regulatory compliance.

Canara Bank’s CRAR stood at a healthy 16.2%, while Bank of Baroda and Union Bank of India reported CARs of 16.54% and 17.07%, respectively, all comfortably above the regulatory minimum.

Repo Rate

The Reserve Bank of India’s policy rate reduction of a 50-basis-point cut in the repo rate to 5.5% and a 100-basis-point cut in the Cash Reserve Ratio (CRR), phased over four tranches during Q2FY26, has helped banks expand their lending books.

Conclusion

Although most of the PSUs performed well, investors must not overlook the hidden risks. In the financial reporting by a few PSUs, some gains came from one-off treasury profits and lower provisioning rather than core business strength. While improved capital ratios and steady margins suggest stability, it is too early to call it a long-term bull phase. For now, PSU banks appear to be in a short-term upswing, and consistent performance over the next few quarters will confirm if a true bull run has begun.

Sources:

News18
ET Now
Business Standard
IndianPSU
Moneycontrol
Indian express
Bank of India
ETNow
HansIndia
Kotak Securities