NEW DELHI: The current benign credit environment has supported asset quality for PSU banks and early warning indicators give no reason to worry, Kotak Institutional Equities said in a report.

Profitability has been further boosted by provision reversals and revenue recovery from bad loan resolutions. While these recoveries will likely hold up in FY2025E as well, a steady decline is inevitable thereby impacting profitability. Given the swift re-rating of valuation multiples, the brokerage has downgraded Canara Bank and PNB.

Bad loan recovery supporting revenues, but it will eventually decline, the report said. PSU banks currently carry a large pool of bad loans (Rs 10.6 trillion) across GNPA and technically written-off (TWO) accounts.

This pool has served as a source of steady recoveries resulting in provision reversals as well as significant revenue contribution (across both interest income and non-interest income).

While bad loan recoveries are unlikely to decline sharply in FY2025E, they will decline eventually as the pool of bad loans ages and declines. This will inevitably put pressure on profitability, thereby making it difficult for the Tier-2 PSU banks to sustainably deliver better return ratios than SBI, the brokerage said.