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HDFC Securities said that the PSU Banking universe selectively offers a favourable risk-reward, especially mid-tier lenders, with scalable franchises, clean books and likely recapitalisation triggers.
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The Indian public sector undertaking (PSU) banking sector, once considered structurally broken, is experiencing early signs of a secular turnaround, buttressed by a combination of governance reforms, modernised digital stack and a gradual turnaround in the quality and sustainability of earnings, brokerage firm HDFC Securities said in its recent note.
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The brokerage said it believes the PSU Banking universe selectively offers a favourable risk-reward, especially mid-tier lenders, with scalable franchises, clean books and likely recapitalisation triggers. It reiterated SBI as its highest-conviction "buy" among the lot, while also initiating coverage on Bank of Baroda, Indian bank, Bank of Maharashtra with "buy" ratings and on Canara Bank & Union Bank of India with "add" recommendations.
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Bank of Baroda | HDFC Securities initiated coverage on Bank of Baroda with a "buy" rating and a price target of ₹290 apiece. This implies an upside of 22% from its previous closing price. The brokerage said the lender is anchored in a combination of superior deposit franchise and best-in-class asset quality, translating into consistently superior credit costs and top-quartile through-cycle return on assets. Factoring in a dip in margin owing to a rate cut cycle, higher opex intensity and upward normalisation of credit costs, partly offset by potential treasury gains, the brokerage said it expects BoB's pre-provision operating profit (PPoP) and Earnings Per Share (EPS) to grow at a Compounded Annual Growth Rate (CAGR) of 13% and 10% over financial year 2025-2027. 
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Bank of Maharashtra | HDFC Securities has initiated coverage on Bank of Maharashtra with a price target of ₹70 per share, indicating an upside potential of nearly 29% from its previous close. It said the lender has a major deposit franchise, lower cost of funds and a superior margin profile. The brokerage said Bank of Maharashtra's best-in-class return ratios currently benefit from a lower effective tax rate and it believes normalisation of tax rate is likely to be counter-balanced by normalisation of provisioning buffers. It expects the lender to sustain its high growth and healthy earnings trajectory building in a 19% and 14% PPoP and EPS CAGR respectively over financial year 2025-2027.
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Union Bank of India | HDFC Securities has initiated coverage on Union Bank of India with an "add" rating and a price target of ₹160 per share, which implies a potential upside of 9% from its previous closing price. The brokerage said the lender is currently "handicapped by a sub-optimal balance sheet". Despite strong recoveries and upgrades over the past three years, the lender continues to witness elevated gross slippages, reflecting a heavily concentrated loan book. "Given the pressure on margins in a rate cut cycle and upward normalisation of credit cost, HDFC Securities has estimated 7% earnings per share CAGR over FY25-27 for the lender.
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Canara Bank | HDFC Securities has initiated coverage on the lender, with its price target of ₹110 being the same as its previous close. It said the lender's weak deposit franchise is impacting the quality of earnings. It said owing to a rate cut cycle, weak margin profile and upward normalisation of credit cost, partly offset by treasury gains, it expects the lender's return on assets to decline by 13 basis points for FY26, and it estimates an earnings per share CAGR of 6% over FY25-27.
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State Bank of India | HDFC Securities has its highest-conviction "buy" rating on State Bank of India with a target price of ₹1,035 per share, which is a 30% upside from its previous closing price of ₹795.75 apiece. The brokerage said SBI is the most dominant franchise among PSU banks with its sector leadership across asset classes, best-in-class deposit franchise, superior asset quality, competitive edge in sourcing, a matured digital stack and continued traction in cross-sell capabilities. It said the lender is best-placed among its peers to counter margin pressures and sustain its growth as well as profitability. It believes the combination of SBI's traditional strengths and newly-added moats is likely to reflect in efficiency gains, resulting in return on assets sustaining above 1%.
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Punjab Bank and Bank of India | HDFC Securities does not have coverage on these two PSU bank stocks. However, for PNB, the brokerage said improving its quality of earnings is essential, while for Bank of India it said the lender still has some ground to cover in comparison to its peers in terms of operating performance, credit underwriting and digital capabilities.
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