HSBC Securities and Capital Markets (India), in a recent report, said public sector banks in India are entering 2026 with conditions that support steady returns and controlled risks. In its India PSU banks 2026 outlook, the brokerage saidhigher-than-industry credit growth, pricing strength, and stable asset quality remain in place, allowing PSU banks to maintain momentum.
HSBC added that State Bank of India and Bank of Baroda, the two PSU banks under its coverage, continue to stand out on earnings visibility and balance sheet strength, leading the brokerage to retain Buy ratings on both lenders.
Pricing strength keeps PSU banks ahead
HSBC said PSU banks continue to dominate large parts of secured lending, which has limited the ability of private banks to compete on price. According to the report, lending segments such as large and mid-corporate loans, loans against property, housing loans, and gold loans together form more than 60% of total lending in India.
HSBC said PSU banks are able to defend market share in these segments because private banks operate with higher return-on-asset targets that restrict aggressive pricing. As the report stated, “PSBs could continue with competitive pricing for high-quality customers, for now.”
The brokerage added that this pricing gap continues to block large private banks from expanding meaningfully in high-quality secured credit.
Market share gains likely to continue
HSBC said PSU banks are steadily gaining market share across corporate, SME, housing, gold, and even vehicle loans. In the first half of FY26, weighted average loan growth for PSU banks stood at 12.5% year-on-year, compared with system credit growth of around 10%.
HSBC said this trend is likely to persist into FY27, with PSU banks expected to grow loans 100 to 300 basis points faster than the system. As per the report, “This should allow PSBs to achieve higher-than-system loan growth.”
The brokerage attributed this advantage to lower loan-to-deposit ratios at PSU banks, which allow them to lend without facing deposit constraints that private banks are currently dealing with.
HSBC on State Bank of India: ‘Buy’
HSBC Securities and Capital Markets (India) has retained a Buy rating on State Bank of India, with a revised target price of Rs 1,150. Based on the closing price of R?s 984.75 on 1 January 2026, the brokerage sees an upside of about 16.8%.
HSBC estimates that State Bank of India can deliver earnings growth of 10 -12% compounded annually between FY26-FY28.
The brokerage said the bank’s return on assets is expected to remain in the 1 to 1.1% range, while return on equity is seen at 16 to 18%, supported by low credit costs and limited exposure to riskier loan categories. HSBC also highlighted that SBI offers a dividend yield of about 1.7%, which adds to total return potential over the medium term
HSBC on Bank Baroda: ‘Buy’
HSBC has maintained its Buy rating on Bank of Baroda, with a target price of Rs 340, implying an upside of around 13% from current levels.
HSBC said Bank of Baroda is also expected to deliver 10 to 12% earnings growth between FY26 and FY28. The brokerage noted that the bank’s dividend yield of about 2.9% strengthens overall return prospects. HSBC estimates Bank of Baroda’s return on assets at around 1 to 1.03%, while return on equity is expected to stay near 14%, supported by low provisioning needs and a high share of secured lending
Low credit costs remain a key support
HSBC said PSU banks continue to benefit from a lower share of unsecured lending, strong corporate recoveries, and exposure to high-quality borrowers. According to the report, this has resulted in lower credit costs compared with private banks, helping PSU banks gain market share in profit before tax.
As HSBC put it in the report, “We believe PSBs under our coverage (SBI and BOB, both Buy rated) could generate healthy returns with low risks.”
Conclusion
HSBC Securities and Capital Markets (India) said current operating conditions for PSU banks remain supportive, with loan growth running ahead of the system, asset quality staying stable, and profitability holding firm. Based on earnings growth, dividend payouts, and the possibility of higher valuations if conditions remain favourable, HSBC said State Bank of India and Bank of Baroda could deliver mid-to-high teens total shareholder returns over the medium term, according strictly to its analysis and estimates in the report.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.