PSU Bank Stocks Jump on Merger Buzz as SBI Signals Support for Fresh Consolidation; Sector Reports Record Q2 Profits

Mumbai | November 17

Shares of public sector banks (PSBs) advanced on Monday after renewed speculation of another consolidation round in India’s state-owned banking system. The Nifty PSU Bank index rose over 2%, with individual stocks such as Central Bank of India, UCO Bank, Punjab & Sind Bank and Indian Overseas Bank gaining up to 4% in early trade. State Bank of India (SBI), the sector’s largest lender, also traded firmly in the green, buoyed by strong quarterly results and fresh policy momentum.

The rally was triggered by a Bloomberg report suggesting that SBI Chairman Challa Sreenivasulu Setty is open to a new phase of PSU bank mergers. Setty said that several state-owned lenders continue to operate at sub-scale levels and that “further rationalisation might make sense.” He added that “if another round happens, it may not be a bad idea,” signalling the lender’s alignment with policymakers exploring structural changes to strengthen the banking system.

Government Prepares Multi-Phase Merger Roadmap

According to media reports, the Finance Ministry is drawing up a roadmap for the next round of PSU bank consolidation, with a formal announcement expected in April–May. Unlike previous one-time merger packages, the new strategy is expected to be executed in two to three tranches, enabling smoother integration and better capital alignment.

Officials quoted in the report said that the government’s long-term objective is to reduce the number of PSU banks from the current 12 to about 6–7 larger, more competitive institutions. The consolidation will focus on building lenders with stronger balance sheets, improved lending capacity and better operational efficiency-particularly to support India’s expanding infrastructure pipeline.

The government is expected to monitor key operating metrics for at least two additional quarters before finalising merger combinations. Early candidates identified by analysts include UCO Bank, Punjab & Sind Bank, Indian Overseas Bank, Central Bank of India, Bank of Maharashtra and Bank of India. These lenders may either undergo smaller-bank mergers first or be directly integrated into large anchor banks such as SBI or Punjab National Bank (PNB).

Record Q2 FY26 Earnings Strengthen Case for Merger

The consolidation push comes on the back of strong financial performance across PSU banks.
Public sector lenders posted a record cumulative profit of ₹49,456 crore in Q2 FY26, reflecting 9% year-on-year growth, even though two banks reported lower earnings. This is a significant improvement from the ₹45,547 crore profit earned in the same quarter last year.

SBI alone contributed around 40% of the sector’s profits, reporting ₹20,160 crore in net earnings, up 10% year-on-year. The bank’s sustained profitability, robust loan growth and improving asset quality have reinforced its central role in the sector’s consolidation architecture.

The strong Q2 performance continues a multi-year turnaround in the PSU banking system. Between FY17 and FY22, the government injected over ₹3 trillion in capital to stabilise loss-making state-owned banks. The last capital support came in FY22, when Punjab & Sind Bank received ₹4,600 crore. Since then, PSU banks have shown consistent improvement in profitability, provisioning coverage, and credit growth.

Recent History of India’s PSU Bank Mergers

India last witnessed major consolidation in April 2020, when 10 state-owned banks were merged into four, reducing the total number of PSU banks from 20 to 12.
The mergers included:

• PNB integrating Oriental Bank of Commerce and United Bank of India
• Union Bank of India absorbing Andhra Bank and Corporation Bank
• Canara Bank merging with Syndicate Bank
• Indian Bank taking over Allahabad Bank

Earlier, in 2017, SBI consolidated its footprint by absorbing five associate banks along with Bharatiya Mahila Bank.

This restructuring significantly enhanced the scale and competitiveness of India’s largest lenders and laid the foundation for the sector’s current profitability.

SBI Pushes Ahead With Technology Modernisation

Alongside the merger discussion, SBI is advancing a major overhaul of its technology infrastructure.
At the Singapore FinTech Festival, SBI Managing Director Ashwini Kumar Tewari said the bank plans to modernise its core banking architecture through hollowisation, microservices adoption, and system externalisation.
The upgrade is expected to be completed within the next two years, strengthening resilience and improving customer experience.

Market View

Another merger cycle could improve scalability, strengthen balance sheets, streamline operations and enhance credit delivery across the economy. The upcoming Finance Ministry announcement expected in April–May will be the key determinant of market direction for PSU bank stocks in the coming months.