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Summary: Ten of 23 stocks clearing Value Research's growth-and-value screen turned out to be PSU banks, and this piece digs into why. It flags which bill shrank and what to check before calling this growth.
Imagine a family that has spent years paying hefty hospital bills. Fortunately, the treatment is successful and the family sees its savings rise. Yet, the salary has barely moved. In such a case, you wouldn’t say that the family has grown its wealth, right? But a stock screen might.
To prove our point, we decided to use Value Research’s stock screener to hunt for businesses that are profitable and cheap, but the profit didn’t come from the business itself, it was due to other reasons. We conducted this exercise across large and mid caps with a Growth Score and Valuation Score above 6.
Upon applying the above filters, we were able to get a list of 23 companies (14 large caps and nine mid caps). Of these, 10 were state-run banks. When one kind of company fills almost half a list, the screen has found a pattern, not 10 separate bargains.
(Important: The Growth Score rates how much a business has grown and at what scale. The Valuation Score reads how cheap a stock looks against its own history and its peers. Both are built from past data, so they say where a company has been, not where it is going.)
PSU banks dominate the list
Of the list of 23 stocks, 10 were state-run banks
| Stock | P/B | Market cap | Growth Score | Valuation Score |
|---|---|---|---|---|
| Bank Of Baroda | 0.71 | Large cap | 8 | 8 |
| Indian Bank | 1.42 | Large cap | 8 | 7 |
| Punjab National Bank | 0.89 | Large cap | 7 | 8 |
| State Bank Of India | 1.51 | Large cap | 8 | 7 |
| Union Bank Of India | 1 | Large cap | 7 | 7 |
| Bank Of India | 0.72 | Mid cap | 7 | 8 |
| IDBI Bank | 1.42 | Mid cap | 8 | 7 |
| Indian Overseas Bank | 1.68 | Mid cap | 9 | 7 |
| Bank Of Maharashtra | 1.81 | Mid cap | 10 | 7 |
| UCO Bank | 0.95 | Mid cap | 7 | 7 |
| Average P/B of private banks is 2.1. IDBI Bank is not technically a PSU, but the Government of India holds over a 45 per cent stake in it. | ||||
The profit grew faster than the business
A bank earns most of its money from interest, what it charges on loans minus what it pays on deposits. Take away running costs, and you are left with operating profit. From that it sets aside provisions, money kept for loans that may never be repaid. What survives provisions and tax is net profit.
For most of these banks, net profit has grown far faster than operating profit. The business grew steadily. The provision bill collapsed. When a high cost falls from a very high level, profit shoots up. That is the base effect. Across all state-run banks, a combined loss of Rs 87,357 crore in FY18 became a combined profit of Rs 1.98 lakh crore in FY26.
The bill shrank because fewer new loans are going bad. In FY26, about 0.7 per cent of these banks' loans turned bad during the year.
This kind of growth runs out. A provision bill shrinks only until it reaches a normal level. After that, profit grows only as fast as the business. The bill may even rise. From April 2027, new RBI rules require banks to provide for expected losses before loans turn bad, and several state-run banks expect a one-time hit of 3-9 per cent of net worth.
Why the market remembers
Banking has a long memory. In the 2003-08 boom, banks lent heavily to large corporate and infrastructure projects that assumed approvals would come on time, costs would stay in check and growth would stay fast. After the 2008 crisis and the slowdown that followed, those assumptions failed: projects stalled and overleveraged borrowers could not repay.
PSU banks suffered most because of whom they lent to. Their books leaned towards corporate and infrastructure borrowers, the hardest-hit segments, while private banks held more retail loans, which saw far less stress.
For a while, banks kept these loans looking healthy by giving borrowers more time. The RBI ordered a clean-up in 2015. By FY18, bad loans (loans overdue for more than 90 days) at state-run banks had reached 14.6 per cent of their loans, and the government put in more than Rs 3 lakh crore to rebuild their capital. Today the figure is below 2 per cent.
A bad loan can disappear from today's balance sheet.
The memory of bad lending does not disappear as quickly from the market's mind.
One name to read carefully
Indian Overseas Bank carries one of the highest Growth Scores here, but it spent years under the RBI's prompt corrective action framework and was loss-making not long ago. Growth measured off a floor that low is arithmetic, not momentum.
What the scores cannot see
The blind spot cuts both ways. Much of the recent loan growth here has come from retail, farm and small-business borrowers rather than a few giant projects. If those books hold up, low provision bills could last longer than the market expects.
Doubters have already paid for their doubt. The Nifty PSU Bank index compounded at about 32 per cent a year over the five years to March 2026, against 11.9 per cent for the broader market. Over its longer history, though, most five-year stretches lagged.
The lesson? When profit grows much faster than the business, find out which bill shrank, and whether it can keep shrinking, before calling it growth.
What you need to do
- Add revenue growth beside profit growth. Revenue for a bank is mostly interest income, so this strips out names whose profit rose only because a bill fell.
- Compare net profit growth with operating profit growth on the stock page. The screener does not filter on this, so check it by hand.
- Check the provision charge against the bank's own long-run average. Setting aside far less than usual flatters this year's profit.
This article is for educational purposes only. The scores shown rest on quantitative historical financial data and should not be construed as recommendations to buy, sell or hold a stock.
Also read: Eleven stocks look better on paper and still trade cheap
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