India’s financial sector, which ended the last financial year on a mixed note, appears to be at a crossroads amid macroeconomic headwinds emanating from the West Asia conflict and the prospects of a poor monsoon, and regulatory tailwinds that can support growth and earnings resilience, especially of banks.
Amid this confluence of favourable triggers and key challenges, this could be the right time for investors to consider banking stocks that are better positioned to capitalise on regulatory tailwinds while navigating macroeconomic uncertainties.
As per Nuvama Institutional Equities, although risks from the West-Asia conflict and El Niño warrant caution, recent Foreign Currency Non-Resident Bank [FCNR (B)] and Emergency Credit Line Guarantee Scheme (ECLGS) measures will provide counter-cyclical support to growth, margins and asset quality of the sector.
Banks better placed to capitalise on regulatory tailwinds
Nuvama prefers banks over NBFCs and, within banks, private banks (PVBs) over public sector banks (PSBs) as the brokerage firm believes they are better placed to capitalise on these regulatory tailwinds and also endure the ensuing ECL transition, thereby delivering superior RoAs.
The brokerage firm believes large private banks are well-positioned for a turnaround over FY27–29E, driven by above-system credit growth, which can lead to gradual market share gains from PSBs and healthy RoAs in the range of 1.8–2.1%, aided by improving margins and lower credit costs.
Besides, select small and medium private banks are better placed to withstand macro disruption due to strong capital augmentation and leadership strengthening, as per the brokerage firm.
Nuvama underscored that public sector banks have outperformed in recent periods due to market share gains, healthy capital buffers for select banks, credible management, and sustained RoA of nearly 1%.
While fundamentals, such as growth and asset quality, remain supportive for near-term outperformance, ECL impact, elevated G-Sec yields and PSB consolidation could stall the rally of public sector banks, said Nuvama.
However, the brokerage firm added that the consolidation may be relatively less painful this time, given cleaner balance sheets.
Banking stocks to buy
Nuvama Institutional Equities has picked some 12 banking stocks that investors can buy now for the long term.
SBI | Previous close: ₹1,036.10 | Target price: ₹1,250 | Upside potential: 21%
Indian Bank | Previous close: ₹814.70 | Target price: ₹1,025 | Upside potential: 26%
HDFC Bank | Previous close: ₹798.90 | Target price: ₹1,025 | Upside potential: 28%
ICICI Bank | Previous close: ₹1,387.60 | Target price: ₹1,800 | Upside potential: 30%
Axis Bank | Previous close: ₹1,356.80 | Target price: ₹1,650 | Upside potential: 22%
IndusInd Bank | Previous close: ₹915.40 | Target price: ₹1,125 | Upside potential: 23%
Federal Bank | Previous close: ₹324.05 | Target price: ₹380 | Upside potential: 17%
RBL Bank | Previous close: ₹363.80 | Target price: ₹470 | Upside potential: 29%
Karur Vysya Bank | Previous close: ₹298.85 | Target price: ₹360 | Upside potential: 20%
City Union Bank | Previous close: ₹201.50 | Target price: ₹250 | Upside potential: 24%
Bandhan Bank | Previous close: ₹202.33 | Target price: ₹250 | Upside potential: 24%
Ujjivan Small Finance Bank | Previous close: ₹56.91 | Target price: ₹72 | Upside potential: 27%
Read all market-related news here
Disclaimer: This article is based on a report by Nuvama Institutional Equities, available on public platforms. This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the broking firm, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
