PSU vs private bank one-year scorecard: SBI, PNB, BoB in the red as HDFC, ICICI, Kotak climb; how should one position their banking sector bets?

Banking stocks have quietly divided into two groups over the past year. As of September 1, the scoreboard shows a clear split among the top banks: While state-owned giants like the State Bank of India (SBI) (-2%), Punjab National Bank (PNB) (-12%), and Bank of Baroda (-7%) are lagging behind, private lenders such as HDFC Bank (+17%), ICICI Bank (+15%), and Kotak Mahindra Bank (+10%) have surged ahead with double-digit gains.

This stark contrast raises an important question for investors: Is the market signalling a long-term preference for private banks over their public sector peers, or is it just a temporary swing? Are all private banks performing well, or only the top ones? And more importantly, how should one position their bets in the banking sector now?

However, one should also not forget that PSU banks have beaten private banks handsomely over the past two to three years. At the same time, the performance of the private bank has been marginally better on a 1-year time scale.

Jyoti Prakash, managing partner at Alphaamoney, stated, "Although the index shows relative stability, the performance of individual stocks tells a different story. Over the past year, private banks like IndusInd and Axis have lost 48% and 10% of shareholders' wealth, respectively. Meanwhile, HDFC, ICICI, and Kotak Banks have provided strong returns of 17%, 15%, and 10%."

So, just looking at the one-year scorecard, Sneha Jain, Investment Manager on smallcase and CEO and founding partner at Wealth Trust Capital Services, says private banks have delivered stronger loan growth, especially in retail and SME segments, while maintaining better asset quality and higher return ratios. Their stronger liability franchise, superior risk management and faster adoption of digital platforms have allowed them to capture market share more effectively. "In contrast, while PSU banks have emerged cleaner post the NPA cycle, they continue to grapple with slower decision-making, weaker operating efficiency and limited pricing power," added Jain.

Where should investors take a bet?

The market is rewarding consistency, profitability, and governance—standard areas where private lenders clearly lead. While PSU banks may benefit cyclically in a credit upcycle, the preference towards private banks appears more structural than temporary.

Singh says, "The investor preference towards private banks is justifiable given their structural advantages. However, despite their disadvantages, public-sector banks with their government guarantees, low-cost deposits, and ability to do business with the underbanked, remain incredibly important for the Indian economy."

Hence, a balanced strategy for prudent investors: Private banks offer growth potential and higher return ratios, while public-sector banks provide stability and support government-led initiatives. Ultimately, choosing banks should be based on valuation, risk appetite, and long-term fundamentals, rather than market fluctuations.

"A strategic allocation should lean towards quality private banks as long-term compounders. Selective PSU exposure can be considered for investors seeking value in a rising credit environment, but private lenders remain the core bet for steady wealth creation," said Jain.