PSU Banks' Earnings Likely To See 15% CAGR Over FY25-27E, Says HDFC Sec; SBI, Bob, Canara Bank Among Top Picks

Public sector banks (PSBs) in India are undergoing a strong turnaround, moving from short-term, cyclical plays to promising long-term investments. They have become more efficient, competitive, and better managed, with improved digital systems and stronger earnings.

"A 15% annual growth in core earnings from FY25-27, driven by better margins, productivity, and efficiency. PSBs are also regaining loan market share and improving customer service," expects HDFC Securities.

However, the brokerage pointed out that even though profitability is improving (with FY25 RoAs nearing 1%), investors still have doubts about the sustainability of profits. "Our analysis suggests that PSBs are on the cusp of a structural reflation in their core profitability trends over the medium-term," added the brokerage firm.

Here are the Key Factors helping PSBs to move in the growth direction:

Cleaner Balance Sheets:

After COVID, PSBs have seen fewer bad loans (1.4%) compared to private banks (2.4%). They've also written off more bad loans (1.3% of assets), helping speed up the clean-up process. Today's PSB loan books are less focused on risky corporate lending, which makes them more stable

More Room for Profit Growth:

PSBs have fewer fixed-rate loans (~10%) than private banks (~30%), they've been hit harder when interest rates fall. But that's changing, banks are starting to shift vehicle loans to fixed rates and may cut savings account interest rates, like SBI has done.

"Overall, PSB profits are expected to grow at around 15% per year from FY25 to FY27, driven by better margins, efficiency, and productivity improvements," noted HDFC Securities.

HDFC Securities have initiated coverage on PSU bank with a buy and add rating on the below listed stocks:

Bank of Baroda (BOB):

BOB has strong deposit base and excellent asset quality, which have helped it maintain low loan losses and strong returns over time. It outperforms peers in profitability. The MSME loan quality is also weaker than peers. Its high loan-to-deposit ratio may limit future loan growth.

Considering falling interest rates, higher costs, and slightly rising loan losses (partly balanced by treasury gains), HDFC Securities expect moderate profit growth over FY25-27.

Bank of Baroda - Recommendation - Buy - Target Rs 290

Indian Bank:

It has a strong deposit base and good profitability among PSU banks due to improving asset quality and high savings deposits. However, its loan and deposit growth have been slower than peers. High exposure to MSME and agriculture sectors adds risk during economic stress.

Unlike other PSU banks, it has fewer old bad loans. Earnings are expected to grow moderately (10%) from FY25 to FY27, with stable returns. But, slow growth and economic uncertainty remain key concerns.

Indian Bank - Recommendation - Buy - Target Price - Rs 735

Bank of Maharashtra:

Bank of Maharashtra (BOMH) has strong fundamentals, including a solid deposit base, improving asset quality, good loan growth, and high provisions. It has delivered strong returns (1.5-1.7% RoA and over 20% RoE) and over 20% loan growth over the past 10 quarters.
Bank of Maharashtra - Recommendation - BUY - Target Price - Rs 70

Union Bank of India:

This public sector bank faces challenges like a weak loan mix, fewer low-cost deposits, and high bad loans. Though it's trying to improve by targeting high-value customers, progress may be slow due to tough competition.

"Because of these issues and expected higher costs, its profits may dip slightly in FY26 before improving in FY27. We see a sustainable return (RoA) of around 1.1%. Given the weaker position, we value UNBK at a 35% discount to SBI", noted HDFC Securities.

Union Bank of India - Recommendation - ADD - Target Price - Rs 160

Canara Bank:

It needs to improve its deposit quality by focusing on more stable and retail deposits. Its recent earnings boost comes from less reliable sources like loan recoveries and bancassurance income, which may not last.

"To improve its valuation, CBK needs stronger, more consistent earnings. With expected margin pressure and rising loan losses, returns (RoA) may fall slightly in FY26 and may not stay above 1%. We value CBK at a 50% discount to SBI and rate it ADD," said HDFC Securities.

Canara Bank - Recommendation - ADD - Target Price - Rs 110

State Bank of India:

The bank has improved its core capital (CET-1) to 11.1%, helped by steady profits and a partial sale of its Yes Bank stake. It also plans to raise ₹250 billion in FY26 to further strengthen capital.

With slower growth and margin pressure due to rate cuts, SBI needs to improve efficiency and boost income from fees and treasury gains to maintain returns.

State Bank of India - Recommendation - BUY - Target Price - Rs 1,035

Overall, the report from HDFC Securites gave a positive view of India's public sector banks, highlighting growth opportunities for investors looking for good returns. It noted that the sector is undergoing structural improvements, with more progress likely in the future.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author, nor GoodReturns. The author, nor the brokerage firm nor GoodReturns would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.