Public Sector Banks Set for Robust Growth in Retail and MSME Loans
Public sector banks (PSBs) in India are poised for significant loan growth in the retail, agriculture, and micro, small, and medium enterprises (MSME) sectors in the upcoming quarter, as highlighted in a recent report by Nuvama Institutional Equities. While corporate lending has increasingly shifted towards mutual funds and capital markets, the demand for loans from individuals, farmers, and small businesses is expected to drive overall growth. The report indicates that most PSBs are likely to report strong performance in these segments.
Bank-wise Loan Growth Forecast
The report provides specific forecasts for loan growth across various public sector banks. Bank of Baroda (BoB) is projected to achieve approximately 4% quarterly loan growth. Other banks, including Punjab National Bank (PNB), Canara Bank, and Indian Bank, are expected to see around 2.5% growth. The State Bank of India (SBI) is anticipated to experience a growth rate of about 3%. However, Union Bank of India is expected to fall below the sector average in terms of loan growth. This trend reflects a broader shift in lending patterns, with PSBs increasingly focusing on retail and agricultural loans to sustain their growth trajectories.
Margins to Face Moderate Pressure
Despite the anticipated strong loan growth, public sector banks are likely to encounter moderate pressure on their net interest margins (NIM). Punjab National Bank expects its NIM to remain flat sequentially, while Bank of Baroda anticipates stable reported NIM, though its core NIM may decline by seven basis points. Indian Bank could see a decrease of under 10 basis points, and Union Bank may experience a contraction of six basis points. Canara Bank is projected to face higher-than-average pressure due to lower current account savings account (CASA) ratios. Meanwhile, SBI expects a five-basis-point drop in its margins. These developments indicate that while loan growth is robust, banks must navigate challenges related to profitability.
Asset Quality Likely to Remain Stable
The Nuvama report emphasizes that asset quality among public sector banks is expected to remain stable, with no significant slippages anticipated. SBI, Bank of Baroda, and Indian Bank are projected to see improved slippage ratios, while other state-owned banks are expected to maintain steady performance. The report notes that asset quality for state banks is likely to remain healthy, with no major slippages expected. This stability is crucial for maintaining investor confidence and ensuring the long-term viability of these institutions.
Return on Assets and Revenue Outlook
The report also addresses concerns regarding the sustainability of return on assets (RoA) at over 1%. Key banks like SBI and Bank of Baroda are expected to maintain RoA above this benchmark, supported by stronger core income. Punjab National Bank may see an expansion in RoA due to a lower tax burden. Additionally, the PSU Bank Index has outperformed the private bank index by nearly 15% over the past six months, driven by robust loan growth and stable asset quality. However, net interest income (NII) growth has faced challenges for both public and private banks, with PSBs experiencing flat to negative NII growth year-on-year in Q1 FY26. Most private banks, excluding HDFC Bank and ICICI Bank, have managed only low single-digit growth, highlighting the competitive pressures within the banking sector.
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