Strong credit growth backdrop supports sector outlook
Speaking on the outlook for private lenders to ET Now, Dnyanada Vaidya highlighted that the larger private sector banks have shown mixed relative performance versus mid-sized peers, but the underlying fundamentals remain supportive.
“The private sector banks clearly, at least the larger ones, have slightly underperformed the mid-sized banks. Now coming to the growth part of it, the latest RBI print that we saw has shown absolutely robust credit growth upwards of 17% and it is the best in the last couple of years, that is one thing that works in favour of private banks and for banks that we cover, under our coverage, we believe that they remain very well placed to continue the overall growth trajectory of roughly 15 odd percent CAGR over the next couple of years.”
She further noted that asset quality remains benign, helping credit costs stay under control, while margins could see gradual improvement.
“Only a slight challenge has been in terms of margins, but overall we believe that the larger private sector banks seem to be better placed when it comes to margin recovery especially given expectations of the rate cycle reversal.”Valuations: rerating possible, but peaks unlikelyOn whether the sector can revisit earlier valuation peaks, the view remained cautious but constructive.“So, yes, of course, that rally we may not see the peak, but we definitely see some rerating opportunity in select names. In the larger private sector banks, we prefer ICICI and Kotak Mahindra Bank amongst the larger private banks given strong growth opportunity, good deposit franchise, and of course very (15:35) under valuations.”What could derail the consensus optimism?Despite the broadly positive setup, concerns remain around macro and liquidity headwinds, especially if interest rate dynamics shift.
“So, of course, there is some uncertainty. Even though we have seen that the deal is now more or less finalised, we would wait for more clarity. But, of course, there could be some headwinds in terms of growth. Now, where that comes from is one, in case there is a rate hike cycle, there could be some deceleration in terms of overall credit growth. Also, the lag impact of the West Asia war especially on the MSME segment or even oil sensitive corporate segment it is not seen so far but we expect some impact to be seen at the end of Q3 or early Q4, so that is something that will be monitorable.”
She also flagged deposit mobilisation as a key risk area.
“So latest print shows about 12-12.2% of deposit growth versus a 17% plus of credit growth. So, yes, that is something that we would like to watch out for.”
PSU banks: selective approach preferredWhile the valuation gap between private and public sector banks has narrowed, the preference remains tilted toward select names in the PSU space.
“So yes, private did trade at, of course, of premium valuation versus the PSU. However, in the last few years, PSU banks have outperformed in terms of growth given their fairly recent LDR levels versus the private banks, that is one thing. Asset quality has improved meaningfully for PSU banks.”
However, the preference remains narrow:
“So, of course, the gap has narrowed but in the PSU pack we believe that we will want to favour only SBI given its very strong growth delivery which is right now ahead of overall systemic growth as well.”
Stock preferences: ICICI, Kotak lead private bank betsOn stock positioning, the preference hierarchy remains clear:
“So, our pecking order would be ICICI, Kotak, and SBI. Of course, these two in the larger private banks and we would remain very selective when it comes to mid and small banks. In the mid banks, we prefer Federal Bank and in the smaller banks, we favour Ujjivan Small Finance Bank.”
On HDFC Bank, concerns around leadership clarity and deposit mobilisation continue to weigh on sentiment.
“There has been challenges in terms of deposit mobilisation, of course, that is one thing. Also, we need better clarity in terms of reappointment of the chairman and also some clarity when it comes to extension of the term of the current MD, CEO. So, this we believe is overhang for HDFC Bank and that is the reason we do not have it in our top picks.”
NBFC outlook: Bajaj Finance preferred amid stabilising trendsIn the NBFC space, the outlook remains constructive for select large players such as Bajaj Finance, with expectations of growth normalisation and stable asset quality.
“Of course, the outlook now and entering into FY27 appears more constructive… growth looks to gravitate to the earlier 24 odd percent CAGR even on a larger base. Asset quality also seems to be on the mend. Margins is area of concern, but we believe that overall margin profile for a bigger NBFC like Bajaj Finance should remain more or less stable.”
On vehicle financiers, recent corrections have made valuations more attractive, but selectivity remains key, with preference tilted toward Shriram Finance over peers like Cholamandalam Investment and Finance Company, citing improving capital and relative positioning.
Rate outlook and market reactionOn the recent rally in financial stocks, expectations around interest rates appear to have played a major role.
“Of course, rate hikes was something that was widely anticipated and was much talked about when we saw the June MPC. Of course, the RBI has revised its inflation estimates and it is near the upper end of the tolerance band when it comes to Q3… in case there is a rate hike, we would probably see that somewhere in the October meeting is what we are looking at.”
She added that rate expectations were largely already priced in, particularly benefiting banks due to lagged transmission effects.
