Global brokerage Macquarie expects Indian banks to stage an earnings recovery in FY28, helped by higher margins, healthy loan demand, easing liquidity pressure and stable asset quality. In a report, the brokerage said banks could deliver about 18% earnings per share growth in FY28, supported by a likely 15 basis points rise in margins and valuations that remain undemanding.
The case for banks has improved after a period of margin pressure. The broker expects private banks to show stronger earnings growth over the next two years as margins improve and operating expenses and credit costs decline. Macquarie also said it is factoring in about 75 basis points of rate hikes over the next 9-12 months, which could support further margin expansion.
The broader backdrop is also turning more supportive for lenders. Liquidity constraints have eased after foreign currency non-resident deposit mobilisation, loan demand remains broad-based, asset quality is healthy and rate increases appear likely.
Macquarie said banks are trading at about 1.3 times FY28 estimated price-to-book value and 10 times price-to-earnings, leaving room for a re-rating if earnings recover as expected.
Among public sector banks, Macquarie upgraded Bank of Baroda to Outperform from Neutral. The brokerage said PSU banks should benefit from fresh FCNR inflows, while stable asset quality and higher rates could help margins and cushion the impact of expected credit loss costs. It expects PSU banks to report return on assets of more than 1% and return on equity of 13-15%.
The brokerage also upgraded Kotak Mahindra Bank to Outperform, saying concerns around deposit mobilisation and softer retail growth are already reflected in valuations. It said Kotak remains positioned to deliver 2% return on assets and 17% loan growth, while its capital position gives it flexibility in a possible rate-hike cycle.
Macquarie’s preferred names among banks are ICICI Bank, Kotak Mahindra Bank, State Bank of India and City Union Bank. It has an Outperform rating on ICICI Bank with a target price of Rs 1,730, Kotak Bank with a target price of Rs 500, SBI with a target price of Rs 1,220 and City Union Bank with a target price of Rs 265.
For non-bank lenders, Macquarie said loan growth should stay healthy, although rising rates and higher bond yields could increase borrowing costs and put pressure on near-term margins. It said asset quality remains a risk, especially in unsecured microfinance and personal loans if inflation persists. Still, the brokerage said most NBFCs are well capitalised and adequately provisioned.
The brokerage upgraded Mahindra Finance to Outperform from Underperform, citing an asset-quality turnaround and a better credit-cost outlook. It raised the target price to Rs 395 from Rs 270. LIC Housing Finance was also upgraded to Outperform, with Macquarie saying valuations look compelling at 0.6 times FY28 estimated price-to-book value.
In fintech, Macquarie upgraded Paytm to Outperform from Neutral and raised its target price to Rs 2,025 from Rs 1,235. The brokerage said stronger revenue growth, better cross-sell and cost control support a sharper margin path. It also said MDR-related revenue could provide an additional opportunity with limited incremental costs.
However, Macquarie downgraded PB Fintech to Neutral from Outperform after cutting earnings estimates following the IRDA commission caps consultation paper. The brokerage said FY28 could be a year of “pain and recalibration” for the company, with earlier FY27 profit levels now expected only by FY30.
In insurance, Macquarie said valuations have turned attractive after concerns around ULIP taxation, surrender-value rules, GST input tax credit ineligibility and commission regulations weighed on the sector. It said regulatory concerns are largely priced in and named LIC as its preferred insurer because of improving margins, lower regulatory exposure and removal of the government stake-sale overhang.
Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here.
