India's financial sector appears to be in a sweet spot, with loan growth at over 4 year high, easing margin risks with improving system liquidity, and benign asset quality despite macro volatility, analysts said.
All these factors coupled with undemanding valuations, makes the setup for the banking sector compelling, according to Bernstein.
In a report on Friday, Bernstein said that India's macro backdrop remains broadly supportive, driven by resilient growth, easing financial conditions and an improving external sector outlook.
It noted that the market rates have softened, which provides a supportive operating environment for the financial sector despite continued global uncertainties.
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“The sector profitability stayed near decadal highs, although elevated macro and external uncertainties continued to weigh on valuations,” said Bernstein.
Meanwhile, private sector banks continued to gain momentum during the June quarter, narrowing the loan growth gap with PSU Banks to ~1 pp and extending their lead in deposit growth, resulting in continued market share gains.
PSU banks delivered a sequential improvement in RoA, while profitability trends across private banks remained mixed.
Outlook Ahead
Bernstein expects the banking sector to sustain healthy growth in FY27, supported by robust liquidity conditions and a recovery in nominal credit growth, although potential policy tightening could moderate momentum later in the year.
“Margin outlook remains stable, with deposit repricing largely behind us and any rate hikes likely to provide an incremental boost to NIMs. Asset quality is expected to remain benign, supporting stable credit costs and earnings resilience,” said Bernstein.
Within the banking sector, it expects private banks to continue narrowing the growth gap with PSU banks, while the latter's greater reliance on borrowings could weigh on relative margin performance.
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Stock Picks
Among stocks, Bernstein has an ‘Outperform' rating on HDFC Bank, with target price of Rs 1,150. It has ‘Outperform' rating on ICICI Bank with a target price of Rs 1,800.
Bernstein also maintained ‘Outperform' rating on Axis Bank and IndusInd Bank, with target prices of Rs 1,600 and Rs 1,000, respectively.
It has ‘Market-Perform' ratings on Kotak Mahindra Bank and State Bank of India (SBI), with target prices of Rs 500 and Rs 1,300 respectively.
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