Indian finance companies are expected to report stable performance in the upcoming financial year amid several tailwinds, including better loan growth, a slight moderation in margins and stable credit costs and operating expenditure ratios, according to Macquarie.
The brokerage's top picks include HDFC Bank Ltd., ICICI Bank Ltd., Aditya Birla Capital, Power Finance Corp., Shriram Housing Finance Ltd., and Life Insurance Corp.
"We expect the banking sector in FY26 to see slightly better loan growth of 13-14%, from the current 11%, driven by a pick-up in retail and SME," the brokerage said. "Due to the cash reserve ratio cut, assuming a money multiplier of 5 times (1/reserve ratio) deposit growth should improve by -200bps (to 13%), thereby aiding credit growth."
The unsecured non-performing loan issues should abate in two quarters, according to Macquarie. It expects the rate cut cycle to be shallow, with no more than 50-75 bps of cuts. "As a result, NIM compression, in our view, should be confined to just 10 bps."
The brokerage has upgraded LIC, ICICI Lombard to 'outperform' from 'neutral' and downgraded SBI Life to 'neutral' from 'outperform'. PB Fintech has also been downgraded to 'underperform' from 'neutral'.
Large private-sector banks compounding remains intact. The brokerage expects large private banks to deliver a 14-19% core earnings per share CAGR (FY25F-FY27F) with 16-17% return on equity. Valuations look quite attractive in that context. "A shallow rate cut cycle limits the impact on NIMs," it said.
Macquarie also noted that for PSU banks there is a risk of a higher impact on expected credit loss norms, given the absence of contingent buffers. They have also been losing market share in deposits, which is a structural concern.
While NBFCs are expected to benefit from rate cuts, the boost to NIMs should be limited, given the lower quantum of rate cuts, the brokerage noted. "We expect lower growth over FY25-27E compared to the previous cycle, owing to lower unsecured growth and RBI regulations," it said. "Our bias is more towards low valuation NBFCs where the risk-reward is more favourable."
On life insurance, the brokerage said regulatory overhang persists. "We factor in the possible impact from an overhaul of distribution regulations to our target multiples," it said. "This, along with margin pressures (from surrender value regulations, competition), should put pressure on VNB growth and underpins our cautious stance."
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