PSU Bank index hits record high as SBI Q3 surprise powers sector rally

Shares of public sector banks (PSBs) rallied on Monday, helping the Nifty PSU Bank index to touch a fresh all-time high, as strong quarterly earnings from State Bank of India (SBI) reignited investor appetite for the sector.

The Nifty PSU Bank index gained nearly 4 per cent in intra-day trade, jumping to a record 9,193, surpassing its previous high of 9,175.55 hit on January 29, 2026. At around 9:30 am, the index was the top-performing sectoral gauge, up 3.4 per cent, even as the benchmark Nifty 50 rose a modest 0.5 per cent.

Following the trend, the Nifty Bank index surged 0.84 per cent, or 507 points, to 60,627.75 as of 11:52 am.

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SBI leads from the front

The rally was largely driven by SBI, the heavyweight of the sector, after it delivered a better-than-expected performance for the December quarter (Q3FY26). SBI shares jumped as much as 7 per cent during the session to hit a new high of Rs 1,137 on the NSE.

SBI reported a 25 per cent year-on-year rise in profit after tax at Rs 21,028 crore — its highest-ever quarterly profit — aided by strong other income and lower-than-anticipated provisions. The bank also benefited from a one-time dividend income of Rs 2,200 crore from SBI Mutual Fund; even after adjusting for this, analysts said the underlying performance remained robust.

Net interest income (NII) rose 9 per cent year-on-year and 5 per cent sequentially to Rs 45,190 crore, while net interest margin (NIM) improved marginally to 2.99 per cent, with domestic NIMs rising 3 basis points sequentially to 3.12 per cent. Management said margins are expected to remain above 3 per cent going forward.

Credit growth outlook improves

One of the key positives that cheered the Street was SBI’s upward revision in its credit growth guidance for FY26. The bank now expects loan growth of 13–15 per cent, compared with 12–14 per cent earlier. SBI’s loan book grew a healthy 15.6 per cent year-on-year during the quarter, while deposits rose 9 per cent.

Although the CASA ratio moderated 50 basis points sequentially to 39.1 per cent, analysts were largely unfazed, citing strong loan growth and improving margins as bigger positives.

Asset quality also continued to improve, with slippages moderating and credit costs remaining benign at 29 basis points, reinforcing confidence around the sustainability of earnings.

Broader PSU bank rally

The optimism around SBI spilled over to other PSU banks as well. Indian Bank rose 4 per cent to Rs 904.85, Bank of India gained 3.5 per cent to Rs 169.38, while Bank of Maharashtra climbed 3 per cent to Rs 67.44 and Central Bank of India rose 3 per cent to Rs 37.95. Union Bank of India, Bank of Baroda, UCO Bank, Canara Bank, Indian Overseas Bank and Punjab National Bank were all up around 2 per cent each.

Over the past one month, the Nifty PSU Bank index has gained about 7 per cent, significantly outperforming the Nifty 50’s 0.5 per cent rise. The outperformance is even more striking over the past five months, with the PSU Bank index surging 34 per cent versus a 3.8 per cent gain in the benchmark.

Brokerages turn more bullish

Brokerage firms responded positively to SBI’s results. Analysts at Motilal Oswal Financial Services said the bank’s all-round performance, healthy credit growth and improving asset quality strengthened the earnings outlook. The brokerage raised its earnings estimates for FY27 and FY28 and reiterated a ‘Buy’ rating on the stock with a revised target price of Rs 1,300.

JM Financial Institutional Securities also maintained a ‘Buy’ rating, citing SBI’s strong and diversified growth profile, resilient margins despite deposit pressures, and industry-leading asset quality. It raised its target price to Rs 1,250, arguing that sustained return on assets of over 1 per cent and mid-teen return on equity justify a premium valuation compared with historical PSU bank multiples.

Macro tailwinds add support

Adding to the positive sentiment, the Reserve Bank of India (RBI) recently flagged improving GDP growth prospects, noting that the drag from external demand could be partly offset by new trade deals, a revival in manufacturing and continued strength in agriculture and corporate activity.

The RBI raised its GDP growth forecast for FY26 to 7.4 per cent and also upgraded projections for the first two quarters of FY27. Analysts at BNP Paribas India said the absence of a rate cut in the latest policy meeting was also a marginal positive for banks’ margins, as every incremental rate cut tends to compress NIMs.