Public sector banks (PSBs) are demonstrating a significant competitive edge over private peers in early 2026. This strength is rooted in a resilient loan-to-deposit (LDR) framework and a notable recovery in core financial metrics. Credit and Deposit Dynamics The system-wide credit-to-deposit ratio has climbed to a historic high of **81.7%** as of February 2026. This surge reflects a persistent gap where credit growth, currently at **13.4%**, continues to outpace deposit growth of **10%**. Private sector banks are facing tighter liquidity constraints with CD ratios often exceeding **90%**. In contrast, PSU banks maintain a healthier range between **72% and 75%**. This lower ratio provides state-owned lenders with substantial "headroom" to expand their loan books without the immediate pressure to hike deposit rates aggressively. Profitability and Earnings Milestone The banking sector achieved a record aggregate net profit of over **₹1 lakh crore** in the third quarter of FY26. PSBs accounted for **₹55,000 crore** of this total, representing a **17.5%** year-on-year increase. Market leaders like State Bank of India (SBI) reported a record quarterly profit of **₹21,028 crore**, a **24%** jump. This performance has led federal authorities to project that total PSU bank profits will exceed the **₹2 lakh crore** milestone by the end of the 2026 fiscal year. Asset Quality and Efficiency Asset quality across the public sector has reached a decade-best level. Net non-performing assets (NPAs) for PSBs fell by **19.1%** year-on-year to **₹51,000 crore**. Key individual ratios are now highly competitive: * Punjab National Bank: **3.2%** impaired loan ratio * Union Bank: **3.1%** impaired loan ratio * State Bank of India: **1.57%** Gross NPA Return on Equity (RoE) for major state lenders remains robust, with SBI reporting a global-standard **20.68%**. Market Sentiment and Capital The Nifty PSU Bank Index has emerged as a top sectoral performer, rallying nearly **12%** in February 2026 alone. The index recently hit a fresh all-time high of **9,665.80**. Capital adequacy remains a pillar of stability. The median capital to risk-weighted assets ratio (CRAR) for public banks stands at **16.5%**, well above regulatory requirements. Major institutions like Bank of Baroda and Union Bank have recently seen viability rating upgrades from global agencies, reflecting their strengthened intrinsic credit profiles.