The state-owned insurer added 6.41 crore shares in SBI worth an estimated ₹5,285 crore during the quarter, according to data from Prime Database. In a parallel contrarian move, LIC quadrupled its stake in Yes Bank—from below 1% in June to 4% by September—even as other domestic institutional investors retreated from the counter.
In the meantime, LIC offloaded estimated ₹3,203 crore worth of shares in HDFC Bank, ₹2,461 crore in ICICI Bank, and ₹2,032 crore in Kotak Mahindra Bank. The sell-down drove total insurance company holdings in these three lenders down 8-10% quarter-on-quarter, marking LIC’s sharpest retreat from India’s private banking aristocracy in recent memory, according to Prime Database.
“A significant trend in the market is the resilience of the PSU banking space. This segment is even now attractively valued in a market which is richly valued,” said VK Vijayakumar of Geojit. “The prospects of this segment look bright in the context of the coming merger of PSU banks.”
Also Read | Rs 2.3 lakh crore boom in 2 months! Why PSU bank stocks staged the biggest comeback of 2025
The rebalancing comes at a curious juncture. While LIC pivots toward public sector banks, foreign investors have poured over $14 billion into India’s private banking sector in 2025. Emirates NBD acquired a 60% stake in RBL Bank for $3 billion, Sumitomo Mitsui raised its Yes Bank holding to 24.2% following a $1.6 billion initial investment, and Blackstone picked up nearly 10% in Federal Bank for ₹6,196 crore.Market expert Neeraj Dewan sees high expectations baked into PSU bank valuations. “There is a lot of expectation from PSU banks. With the smaller ones also coming out with a decent set of numbers, what will be important to watch is with the interest rates cut happening, liquidity in the system whether they have been able to get that kind of demand for loan,” Dewan said. “I think because it is coming out after a rally in the PSU bank, so there is a very little chance of a miss there. If there is a slight miss, that street may not like it too much.”LIC’s broader equity strategy reinforced its value-hunting approach. The insurer raised stakes in 68 NSE-listed stocks during the quarter, with an average purchase price decline of 5.55%, signaling a tactical tilt toward beaten-down counters. Conversely, it trimmed positions in 94 companies where prices held firm—a classic profit-booking maneuver.
According to Motilal Oswal, private banks delivered better-than-expected Q2 results, supported by improved net interest margins and healthy credit growth, while PSU banks also reported solid outcomes. Many banks have guided for further margin improvement in the second half, driven by the cash reserve ratio cut and accelerating growth momentum.
ArunaGiri N, CEO of Trustline Holdings, believes the foreign investment wave could presage broader institutional flows. “FDI inflows, in many ways, are often precursors to broader institutional participation. If history is any guide, this renewed foreign investor interest could soon translate into a meaningful comeback of FIIs into India’s private banking space,” he said.
In the last 3 months, Nifty PSU Bank index is the top gainer and has given over 21% return while Nifty Bank is up just over 4%.
Shibani Sircar Kurian of Kotak Mahindra AMC said the valuations in the banking sector is attractive, especially relative to history, notwithstanding the near-term move. “So overall, our view on banks is positive, slight preference for privates but within the PSU bank our preference remains for the larger names where you still see possibility of return ratio improving and valuations are in your favour.”
“Larger PSU banks are better placed to benefit both from credit growth picking up, especially on the retail front as well as margins bottoming out, because cost of deposits start to play out in terms of lower cost of funds and these banks which have a better retail liability franchise are well placed.”
The government is also said to be planning to allow direct foreign investment in state-run banks of up to 49%, more than double current limits. If that happens, Nuvama estimates that PSU banks could see a windfall of up to $4 billion in passive inflows.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)