India's financial sector is on the cusp of an earnings growth revival, according to BNP Paribas. Key factors, such as liquidity support and expected monetary easing, will drive acceleration in credit and Current Account Savings Account growth, the brokerage said. It expects a forthcoming rate cut by the Reserve Bank of India in February 2025.
While liquidity challenges emerged in December 2024, largely due to dollar sales by the RBI as part of its foreign currency reserve management, this should ease with a shift in the RBI's policy stance. The reduction in foreign reserves has sparked concerns, but BNP Paribas expects a pivot in monetary policy, which will help support liquidity and, consequently, credit growth.
While BNP Paribas acknowledges the pressures in the unsecured lending segment—particularly in personal loans and credit card growth— these concerns are relatively minor for large private sector banks with stronger balance sheets, it said. The stress is more pronounced among smaller ticket categories dominated by fintechs and new-generation non-banking financial companies. However, the bank remains cautious about microfinance institutions, where stress levels are higher due to a highly correlated default risk among borrower groups.
Many financial stocks, particularly among the best performers, are now available at below-median valuations, making the risk-reward balance attractive, BNP Paribas said. It has maintained its sector stance and stock preferences, recommending HDFC Bank Ltd. as its top pick among banks and Bajaj Finance Ltd., as its top choice among NBFCs. On the other hand, it has downgraded its outlook for Kotak Mahindra Bank Ltd. and SBI Cards & Payment Services Ltd., labeling them as key underperforms.
Turning to the life insurance sector, BNP Paribas sees a shift from a period of regulatory challenges to one of tailwinds. With regulatory headwinds like commission and surrender value changes now behind, upcoming regulations such as the adoption of International Financial Reporting Standards and new solvency norms are expected to be sector tailwinds.
BNP Paribas also anticipates that if rate cuts materialise as expected, non-par savings products will see a pick-up in sales.
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