Indian public sector undertaking (PSU) banks have transformed into a dominant market theme on Dalal Street. This shift is fueled by a rare combination of robust credit expansion, multi-decadal low bad loans, and consistent record-breaking profitability. The collective market capitalization of the 12 state-run lenders has climbed significantly, recently reaching approximately 21.36 lakh crore. This surge represents a massive valuation re-rating that has consistently outperformed private sector competitors over the last several quarters. Market leadership is anchored by State Bank of India, which currently commands a market cap of over 11.12 lakh crore. Other major contributors include Bank of Baroda at 1.57 lakh crore and Punjab National Bank at 1.45 lakh crore. The Nifty PSU Bank Index reflects this momentum, currently trading near 9,547 points and delivering 1-year returns of approximately 61.69%. Financial health across the sector has reached a turning point. Net profits for public sector banks surged 26% to reach 1.78 lakh crore in the 2024-25 fiscal year. More recently, the group posted a record cumulative profit of 49,456 crore for the second quarter of the 2025-26 fiscal, a 9% year-on-year increase. SBI alone contributed nearly 40% of these earnings with a net profit of 20,160 crore. Asset quality has seen a structural improvement. The Gross Non-Performing Asset (GNPA) ratio for state banks fell to a multi-decadal low of 2.1% as of September 2025. This is a dramatic recovery from the peak of 14.58% seen in 2018. Net NPAs have also reached record lows of 0.52%, supported by stronger provision buffers and improved credit discipline. State-run lenders currently hold a competitive edge in liquidity. While private banks grapple with high credit-to-deposit (CD) ratios near 90%, PSU banks maintain a more comfortable CD ratio of roughly 75%. This provides them with significant "lending headroom" to support credit growth, which is currently tracking at 11% year-on-year. The sector is also seeing a rise in investor rewards. Post-2022, PSU banks have consistently offered higher dividend yields, with the index currently maintaining a yield of approximately 2.09%. Valuation remains attractive for many investors, with the sector trading at a price-to-earnings (P/E) ratio of 9.23 and a price-to-book (P/B) value of 1.52. Government reforms and capital management continue to support this trajectory. With capital adequacy ratios standing at a decade high of 16.4%, these lenders are well-positioned to absorb potential economic shocks while continuing to fund India's infrastructure and retail credit demands.