UBS sees upside in PSU Banks, upgrades SBI and Bank of Baroda on growth and valuation comfort

Global brokerage UBS has upgraded its stance on two major public sector banks – State Bank of India (SBI) and Bank of Baroda (BoB) – anticipating that potential monetary policy easing by the Reserve Bank of India (RBI) could enhance their growth prospects. UBS believes the recent underperformance of these banking stocks has improved their risk-reward profiles and supports a more constructive outlook, especially for Bank of Baroda due to its relatively cheaper valuation.

SBI Upgraded to ‘Neutral’ Amid Balanced Risk-Reward Outlook

UBS has raised its rating on SBI from 'Sell' to 'Neutral' and increased the price target to ₹840 per share. The brokerage highlighted that India’s largest lender stands to benefit from a low cost of funds, a favourable liquidity environment, and tax rebates announced in Budget 2025.

UBS believes that SBI’s lower share of loans linked to the External Benchmark Lending Rate (EBLR) – at 40 percent versus 45–60 percent for private peers – could limit pressure on net interest margins (NIMs) in a potential rate cut cycle. Additionally, with corporate asset quality remaining benign, credit costs are expected to stay stable. UBS noted SBI’s improved liquidity position, citing an ₹80,000 crore surplus at March-end compared to a peak deficit of ₹3.3 lakh crore earlier.

Despite these positives, UBS remains cautious about SBI’s valuation. At 1.0x September 2026 estimated price-to-book value (P/BV), the stock is priced about 20 percent higher than Bank of Baroda. UBS believes this premium reflects market expectations of above-industry growth but sees limited room for further re-rating unless SBI sustains its current NIM levels.

"Any material re-rating will depend upon sustaining NIMs. We estimate sub-1 percent RoA levels for FY26 and FY27. Capital raise concerns and limited upside to core PPOP-to-assets ratio (1.5 percent vs 2.8–3 percent for private peers) may cap near-term gains," the brokerage said.

UBS has marginally raised its earnings per share (EPS) estimates for SBI by 3–5 percent and lifted its loan growth expectations by 100 basis points for FY26–27 to 14 percent.

Bank of Baroda Upgraded to ‘Buy’ on Strong Valuation Comfort

UBS turned more bullish on Bank of Baroda, upgrading the stock to 'Buy' from 'Neutral' with a raised price target of ₹290. The brokerage cited BoB’s relatively attractive valuations, stable asset quality, and strong credit growth as key factors for the upgrade.

At 0.8x September 2026 P/BV estimates – close to its five-year average – the valuation is seen as undemanding. UBS believes this offers investors a favourable risk-reward setup, particularly given the bank’s higher exposure to MCLR-linked loans, which should help cushion NIM compression during a rate cut cycle.

UBS projects BoB’s RoA to stay near 0.9 percent and RoE around 13 percent for FY26–27. It expects credit growth of 12 percent, supported by a strong retail and MSME franchise. The bank’s loan-deposit ratio (LDR) at 83 percent and liquidity coverage ratio (LCR) at 130 percent provide adequate headroom for growth, it added.

“Domestic loan growth has remained healthy at 12 percent YoY, with MSME and retail driving the momentum. Stable MSME asset quality and a relatively low mix of unsecured loans should ensure credit costs remain well-managed,” UBS said.

As part of its forecast revisions, the brokerage has lowered its credit cost estimate for BoB by 20–25 basis points to 70–75 basis points and revised earnings estimates upward by 8–15 percent for FY26–27.

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