Global investment firm UBS has recently revised its outlook on two prominent public sector banks in India, namely the State Bank of India (SBI) and the Bank of Baroda (BoB). This upgrade comes in anticipation of potential monetary policy adjustments by the Reserve Bank of India (RBI), which could positively influence the growth trajectories of these banks. The firm perceives that the recent decline in the share prices of these banking institutions has created a more favorable risk-reward scenario, particularly for Bank of Baroda, which is currently enjoying a lower valuation.

SBI’s Rating Boosted to ‘Neutral’

UBS has elevated its rating for SBI from ‘Sell’ to ‘Neutral’, increasing the price target to ₹840 per share. The brokerage points out that SBI, as the largest bank in India, is well-positioned to take advantage of a favorable liquidity climate, lower funding costs, and tax incentives introduced in the 2025 Budget. Notably, SBI’s exposure to loans tied to the External Benchmark Lending Rate (EBLR) stands at 40%, which is significantly lower than the 45-60% seen in its private sector counterparts. This lower ratio is expected to cushion the impact on net interest margins (NIMs) during any forthcoming cuts in interest rates.

• Improved Liquidity: SBI reported a surplus of ₹80,000 crore at the end of March, a stark recovery from a previous deficit of ₹3.3 lakh crore.
• Stable Credit Costs: With corporate asset quality remaining robust, UBS anticipates that credit costs will stabilize.

Despite these encouraging indicators, UBS expresses caution regarding SBI’s current valuation, noting that the stock is trading at 1.0x its estimated price-to-book value (P/BV) for September 2026—about 20% higher than Bank of Baroda. The premium reflects market expectations for growth that may be difficult to sustain without maintaining current NIM levels.

UBS mentioned, "Any significant re-rating hinges on sustaining NIMs. We project sub-1% return on assets (RoA) for FY26 and FY27. Concerns about capital raising and limited upside to the core PPOP-to-assets ratio (1.5% vs. 2.8-3% for private peers) could restrict near-term price movements." As part of its assessment, UBS has slightly increased its earnings per share (EPS) estimates for SBI by 3-5% and raised its loan growth forecast by 100 basis points to 14% for FY26-27.

Bank of Baroda Receives ‘Buy’ Rating

On the other hand, UBS has adopted a more optimistic stance on Bank of Baroda, upgrading its rating from ‘Neutral’ to ‘Buy’ and setting a new price target of ₹290. The brokerage cites BoB’s attractive valuations, consistent asset quality, and strong credit growth as pivotal factors in this decision.

• Valuation Comfort: BoB is currently trading at 0.8x its September 2026 P/BV estimates, aligning closely with its five-year average, making it an appealing investment option.
• Resilient NIMs: The bank’s higher exposure to MCLR-linked loans is expected to mitigate the impact of NIM compression during a rate cut cycle.

UBS forecasts that BoB’s RoA will stabilize around 0.9% while the return on equity (RoE) is projected to be approximately 13% for FY26-27. Credit growth is expected to reach 12%, bolstered by a robust retail and MSME (micro, small, and medium enterprises) segment. Additionally, the bank’s loan-deposit ratio (LDR) is at 83% and its liquidity coverage ratio (LCR) stands at 130%, providing ample room for growth.

"Domestic loan growth remains strong at 12% year-on-year, primarily driven by MSME and retail sectors. The stable asset quality in the MSME space and a relatively low proportion of unsecured loans should keep credit costs well-managed," UBS stated.

As a result of its updated forecasts, UBS has lowered its credit cost estimates for Bank of Baroda by 20-25 basis points to 70-75 basis points, and revised its earnings estimates upward by 8-15% for FY26-27.

This comprehensive analysis of SBI and Bank of Baroda underscores the evolving dynamics within India’s banking sector, highlighting potential investment opportunities shaped by monetary policy changes and market conditions.