In a report on Wednesday, July 15, brokerage firm Jefferies said the next industry-wide wage settlement for PSU banks, due in November 2027, could emerge as a significant earnings headwind.
The brokerage expects the wage revision to be broadly similar to the previous 17% settlement and believes the combination of higher employee costs and the transition to Expected Credit Loss (ECL) provisioning from financial year 2028, could weigh on profitability of these state-run lenders. As a result, it continues to prefer private sector banks over PSU lenders.
PSU banks are subject to a wage settlement every five years. While the previous settlement took more than a year to conclude, Jefferies noted that the government has asked banks to complete the next one on time by November 2027. The brokerage expects a wage increase similar to the previous 17% settlement, citing inflation levels that are broadly comparable to the last cycle and a marked improvement in PSU bank profitability.
During the previous wage settlement, banks made provisions equivalent to about 12% of employee costs over six quarters, with most of the provisioning taking place closer to the final settlement.
Employee costs have already risen sharply following the last wage revision. Staff costs across PSU banks increased 22% between financial year 2023 and 2025. SBI saw a relatively lower increase of 12%, which Jefferies attributes to more conservative provisioning.
Excluding SBI, staff costs rose 29% over the same period. Punjab National Bank recorded the highest increase at 44%, followed by Indian Bank at 31% and Canara Bank at 30%.
Looking ahead, Jefferies expects staff costs for PSU banks to rise another 19% over financial year 2027 to 2029. It estimates that every 5% increase in staff costs could reduce FY28 pre-tax profit by 3% to 5%, with PSU banks excluding SBI facing the highest earnings risk. Among individual lenders, PNB is the most sensitive to higher staff costs.
Another Big Headwind For PSU Banks
The brokerage also highlighted another headwind. It expects the shift to the Expected Credit Loss provisioning framework from FY28 to increase credit costs by around 10 basis points. According to Jefferies estimates, a 10% increase in credit costs could reduce sector-wide FY28 pre-tax profit by around 2%, while the impact for PSU banks could be larger, at closer to 3%.
Jefferies believes private banks are better placed to absorb these pressures because their employee cost structures differ and their profitability is less sensitive to higher credit costs. It also said PSU banks may have to reprice loans to offset rising costs, a move that could improve growth and profitability for private lenders.
The brokerage continues to prefer private banks over PSU banks and retains SBI as its top pick within the PSU banking space.
