Foreign brokerage Macquarie in its latest note upgraded four stocks from banking and financial space while cutting its ratings on four others, as it sticks with private sector banks and avoids PSUs, NBFCs, insurance and fintech shares.
Among banks, Macquarie has upgraded Kotak Mahindra Bank Ltd and City Union Bank from 'Neutral' to 'Outperform', saying these stocks have underperformed in the past 12-24 months and, thus, valuations are cheap and risk-reward is favourable.
It has downgraded State Bank of India (SBI) to 'Underperform' from 'Neutral' after recent outperformance and upcoming ECL regulations, falling ROAs and ROEs, and possible equity capital raise.
Among NBFCs, Macquarie has downgraded Bajaj Finance, Cholamandalam, M&M Finance from 'Neutral' to 'Underperform' on expectations of lower growth, falling ROEs, and a delayed rate cut cycle.
The foreign brokerage stayed cautious on the insurance space but upgraded SBI Life to 'Outperform' from 'Neutral' as it feels the life insurer is affected less by the IRDA regulations. Macquarie expects SBI Life to deliver sector-leading VNB (value of new business) growth of 15 per cent and feels valuations in that context are reasonable.
The foreign brokerage said private sector banks are at attractive valuations and expected to report 16-18 per cent return on equity (ROE) over the next couple of years. Its top picks include Axis Bank and IndusInd Bank in the banking space and Shriram Finance and LIC Housing Finance in the NBFC space.
Macquarie said private sector banks are a steady power of compounding story. Despite a lower loan growth environment, it expects private sector banks to report healthy return on assets (ROAs) and ROEs over the next three years and remain steady power of compounding stories.
"We expect healthy ROEs in the 16-18 per cent range. They are less affected by ECL regulations and carry contingent buffers (most of them) and we do not see any adverse asset quality outlook. A delayed rate cut cycle further cushions NIMs for them in the near term. We make marginal changes to our earnings estimates for private sector banks after their full-year numbers, and raise TPs for most of them as we roll our valuation-based models forward to FY26E, from FY25E," it said.
Macquarie said PSU banks will see falling ROEs driven by normalisation of credit costs. There is additional risk of ECL impact which we are yet to factor in our earnings. Life insurance companies will face lower VNB growth this cycle driven by falling margins. NBFCs no longer have the advantage coming from rate cuts in the near term and full impact of RBI regulations (increase in RWA) will be felt in terms of lower loan growth, margins, and return ratios in FY26E. Risk-reward is also unfavourable for some of the larger NBFCs, it said.