Whalesbook
### The Valuation Arbitrage in PSU Banking
Investor focus is sharpening on the valuation discrepancies within the public sector banking (PSU) segment. Mid-sized PSU banks are presenting a more attractive entry point compared to the sector's largest entity, State Bank of India (SBI). For instance, Central Bank of India trades at a price-to-book (P/B) ratio of approximately 0.83 to 0.95 times, and Bank of India at around 0.84 to 0.97 times. UCO Bank follows with a P/B of about 1.17 times. In contrast, Bank of Maharashtra trades at approximately 1.76 times its book value, while Indian Overseas Bank and Punjab & Sind Bank are valued at 1.8 times and 1.4 times, respectively, as per initial assessments. State Bank of India, the sector behemoth, commands a P/B ratio of around 1.8 to 1.95 times. This valuation gap extends to P/E ratios, with Central Bank of India at approximately 6.89x and Bank of India at 7.13x, significantly lower than SBI's 12.19x.
### Q3 FY26 Performance: Resilience Amidst Margin Headwinds
Despite the Reserve Bank of India's repo rate adjustments in December 2025 creating temporary pressure on Net Interest Margins (NIMs) across the banking sector, several mid-sized PSUs demonstrated strong operational performance in the December 2025 quarter. Central Bank of India posted a notable 31.7% year-on-year net profit increase, reaching ₹1,262.6 crore. This was supported by a solid 21% expansion in advances, primarily fueled by a 20.9% surge in retail loan growth. Bank of India reported a 7.5% rise in net profit to ₹2,704.7 crore, driven by 15% loan growth, including a 20.6% uptick in its retail segment. UCO Bank saw its net profit climb 15.8% to ₹739.5 crore, benefiting from 17.2% overall loan growth and a substantial 28.2% surge in retail loans. These results indicate that a focus on higher-yielding retail assets helped these banks mitigate NIM compression.
### Asset Quality and Stock Market Reactions
The improved asset quality further bolstered the profitability of these mid-sized PSUs. Central Bank of India's net non-performing asset (NPA) ratio decreased to 0.45% from 0.59% year-on-year, accompanied by a reduction in provisions. Similarly, Bank of India's net NPA ratio improved to 0.6% from 0.85%, and UCO Bank's net NPA ratio declined to 0.36% from 0.63%. These improvements, coupled with healthy loan growth, contributed to higher net profits. On the trading front, Bank of Maharashtra was nearly flat at ₹66 in late Friday trading, holding near its 52-week high. Bank of India, however, declined by 3.7% to ₹160.3, while UCO Bank slipped 0.6% to ₹28.8 and Central Bank of India fell nearly 2% to ₹36.5, showing varied market responses despite the positive operational metrics.
### Investor Outlook and Future Trajectory
Going forward, investors will closely scrutinize the ability of Central Bank of India, Bank of India, UCO Bank, Bank of Maharashtra, and others to sustain loan book growth, effectively manage NIMs, and maintain asset quality. UCO Bank has guided for loan growth between 12-14% for FY26 and NIMs of 2.8%-2.9%. The broader mid-cap PSU banking sector appears poised for reasonable growth, supported by cost-effective valuations relative to SBI. Any announcements regarding government consolidation plans for public sector banks could also influence investor sentiment. State Bank of India is slated to report its December 2025 quarter results on February 7, 2026, which will provide a crucial benchmark for the sector.