New Delhi

Public sector banks (PSBs) are expected to outperform broader system credit growth over the medium term, noted HSBC Global Investment Research report. The report says that, "PSBs should achieve loan growth that is 100-300bp higher than system credit growth," driven by balance sheet strength, improved underwriting standards and sustained momentum in corporate and retail demand.

In its latest outlook on Indian PSU banks, HSBC said the sector is entering a phase of structurally stronger growth following a prolonged clean-up cycle. "PSBs are well placed to gain market share given improved capital positions, healthier balance sheets and competitive pricing," the report noted, adding that credit growth is likely to remain broad-based across corporate, MSME and retail segments.

HSBC highlighted that asset quality has materially improved across the PSU banking system, with legacy stress largely resolved. According to the report, "Gross NPL ratios for PSBs have declined to multi-year lows, supported by recoveries, write-offs and tighter credit underwriting," This, coupled with lower incremental slippages, is expected to support profitability and risk appetite.

On margins, the brokerage said that while net interest margins (NIMs) may moderate from peak levels, they should remain structurally stronger than historical averages. "We expect margins to normalise but remain well above pre-Covid levels, supported by better loan mix and improved pricing discipline," the report said.

The report also pointed to operating leverage as a key earnings driver over FY26-27. "Cost-to-income ratios should trend lower as revenue growth outpaces operating expense growth, aided by digitisation and branch productivity gains," it said. This is expected to translate into sustained improvement in return ratios.

HSBC further noted that capital adequacy across PSU banks is no longer a binding constraint. "Most PSBs now operate with comfortable capital buffers, reducing dependence on frequent equity dilution, " the report said, adding that internal accruals should be sufficient to fund medium-term growth plans.

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On valuations, the brokerage maintained a constructive stance, stating that "PSU banks continue to trade at a discount to private peers despite improved returns, asset quality and governance." HSBC believes this creates scope for re-rating, particularly if return on equity sustains in the mid-teens.

Overall, the report concluded that the sector offers "mid- to high-teens return potential over the medium term," underpinned by faster-than-system loan growth, stable asset quality and improving profitability metrics, positioning PSU banks as a key beneficiary of India's ongoing credit cycle.