4 Best PSU Midcap Banking Stocks to Watch in 2026

The last few years have seen a remarkable turnaround in the performance of public sector banks (PSUs).

Between FY23 and FY25, net NPAs of PSU banks declined sharply from 1.24% to 0.52%, net profit increased from Rs 1,040 bn (bn) to Rs 1,780 bn, and dividend payouts grew from Rs 209.64 bn to Rs 349.90 bn.

Today, most PSU banks maintain adequate capitalisation, with their capital to risk-weighted assets ratio standing at 16.15% as of March 2025.

As we head into 2026, PSU banks may perform even better going forward. Let's take a look at some of the top midcap PSU banking stocks that you can add to your 2026 watchlist.

When we say best, it is based on the highest return on equity, taken from the Equitymaster screener. It is also based on a robust capital adequacy ratio. This editorial is not a stock recommendation of any kind.

#1 Bank of Maharashtra

First on our list is the stock of Bank of Maharashtra.

Bank of Maharashtra is a prominent Indian public sector bank founded in 1935. The bank was originally established to support small businesses and traders. It has a diversified banking business spanning treasury, corporate/wholesale banking, retail banking, and other operations.

Bank of Maharashtra has a very healthy return on equity of 19.3%. The government of India currently owns a stake of 79.6% in the bank, which has remained the same for many years now.

Bank of Maharashtra Financial Snapshot FY23-25

Bank of Maharashtra has reported superb results over the last few years.

Net profits have more than doubled from Rs 26,050 m in FY23 to Rs 55,418 m in FY25. The net interest income has grown at a very healthy pace.

The capital adequacy ratio at more than 20% is considered very good and indicates that the bank has a strong capital base relative to its risk-weighted assets. The ratio is way higher than the norm mandated for banks by the Reserve Bank of India.

Moving ahead, there is a possibility of a share sale happening shortly by Bank of Maharashtra. This is to comply with the Securities Contract (Regulation) Rules, which mandate that all listed companies, including those in the public sector, must have a minimum public shareholding of 25%.

Should there be a share sale it would reduce the government of India's holding and ensure public shareholding of minimum 25%.

Overall, Bank of Maharashtra is poised for stable growth driven by improving earnings, strategic capital infusion, and a growing focus on retail and corporate banking segments.

To know more check the Bank of Maharashtra fact sheet and latest quarterly results.

#2 Bank of India

Next on our list is Bank of India.

The bank offers a wide array of banking and financial products including retail, corporate, and digital banking services, deposit accounts, loans, credit cards, insurance, investment products, and specialised financial services through subsidiaries.

The government of India holds a 73.38% stake in Bank of India.

The bank has a healthy return on equity of 11.8%.

Bank of India Financial Snapshot FY23-25

On the financial front, the net interest income of Bank of India has soared from Rs 204,911 m in FY23 to Rs 247,135 m in FY25.

However, the net interest income growth of the bank has slowed over the last couple of years. Nonetheless, the net profits have risen sharply from Rs 38,380 m in FY23 to Rs 95,483 in FY25. The rise in net profits is largely on account of lower provisions made.

Provisioning is the process where banks set aside a certain amount of money from their profits to cover potential losses on loans that may not be repaid.

The capital adequacy ratio of the bank is strong at 17.8%.

Looking ahead, the Indian government is chalking out a plan to merge Union Bank of India and Bank of India, the Mint reported. If this were to happen, the merger will create the country's second largest state-run bank, after State Bank of India.

In any case, the future outlook for Bank of India appears optimistic with potential for steady growth over the next few years.

Key positive factors include expected improvement in asset quality, ongoing digital transformation initiatives, and support from government policies favouring public sector banks.

To know check the Bank of India fact sheet and latest quarterly results.

#3 Central Bank of India

Next on our list is Central Bank of India.

Central Bank of India is a government-owned bank in India, one of the oldest and major public sector banks. The government holds a solid 89.27% stake in the bank.

The bank offers a wide range of products such as savings and current accounts, fixed deposits, personal and business loans, and government-related financing, with a significant branch network across the country.

The bank has a return on equity of 10.7%.

Central Bank of India Financial Snapshot FY23-25

On the financial front, the net interest income of Central Bank of India has risen from Rs 117,520 m in FY23 to Rs 139,678 in FY25, showing a steady growth.

However, the net interest income growth has been falling over the last couple of years. Despite this, the net profits have surged to Rs 39,342 m, which is largely to do with lower provisioning.

Moving ahead, the government of India may sell a portion of its stake in Central Bank of India to comply with SEBI's minimum public shareholding norms, which require listed companies to have at least 25% of shares held by the public.

According to reports, the government is preparing to divest up to 20% of its stake in Central Bank of India over the next six months to a year through mechanisms like Qualified Institutional Placement (QIP) and Offer for Sale (OFS).

With steady deposit growth, improved asset quality, strong capital adequacy, and focus on expanding retail and housing finance segments, Central Bank of India is positioned on a recovery and growth trajectory.

However, it must continue managing risks and improving margins amid competitive pressures in the banking sector.

To know more check the Central Bank of India fact sheet and latest quarterly results.

#4 Indian Overseas Bank

Next on our list is Indian Overseas Bank.

Indian Overseas Bank is a major Indian public sector bank headquartered in Chennai. It was nationalised in 1969 along with 13 other major banks.

The bank offers a wide range of banking and financial services including personal and business banking, loans, credit cards, insurance, investment products, and specialised services for Non-Resident Indians (NRIs).

The bank has an extensive network and branches in Hong Kong, Singapore, Bangkok, and Colombo.

Indian Overseas Bank has a return on equity of 10.6%. The government of India holds a 94.61% stake in the bank.

Indian Overseas Bank Financial Snapshot FY23-25

Indian Overseas Bank like peers has grown in net interest income and profitability over the last few years. The net interest income has surged from Rs 82,607 m in FY23 to Rs 108,992 m in FY25. The net profits too have grown over the same period from Rs 21,040 m to Rs 33,955 m.

The bank has a solid capital adequacy ratio of 19.7%, indicating that it has adequate buffer. Indian Overseas Bank has shown improving return on capital employed in recent years, indicating better capital efficiency.

Moving ahead, like peers the government stake in the bank may be cut to meet SEBI norms of minimum public shareholding.

Overall, Indian Overseas Bank is likely to benefit from the expected growth in banking demand as the Indian economy expands, and possible government measures aimed at strengthening public sector banks.

To know more check the Indian Overseas Bank fact sheet and latest quarterly results.

Should You Consider PSU Midcap Banking Stocks?

PSU banks have shown a remarkable transformation over recent years, with significant improvement in asset quality (reduced NPAs), stronger profitability, and government support through recapitalisation, which makes many of them more stable.

However, thorough due diligence on specific banks' financial health, NPA levels, capital adequacy, and growth prospects should be done.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...