State Banks Lead 2025 Market Surge: Strong Profits, Cleaner Books

• PSU banks significantly outperformed private sector banks in 2025 equity markets, with gains of 8-32% driven by stronger asset quality and profitability.
• Indian Bank was the top PSU performer with a 34% rise; private banks saw 2-23% gains, led by Federal Bank.
• The rally cooled after the government clarified no plans to raise the FDI limit in state-run banks from 20% to 49%.
• PSU banks reported higher net profits and stronger asset quality (lower NPA ratios) than many private peers in Q2FY26.
• The banking sector outlook for FY2026 is stable, with potential PSB consolidation plans to reduce state-owned lenders to four by FY27.

Why It Matters: Investors should note PSU banks' outperformance and future consolidation plans.