In its Q3 preview note on India financials, HSBC Global Research expects earnings pressure for domestic banks from a slower loan growth. The foreign brokerage sees pressure on net interest margin (NIM), but some normalisation in credit costs. In the case of NBFCs, large lenders are seen reporting healthy earnings. Lenders with MFI portfolios are likely to report high credit costs, HSBC said.
The foreign brokerage prefers HDFC Bank Ltd, ICICI Bank Ltd, Axis Bank Ltd, Bajaj Finance Ltd and Shriram Finance Ltd in the current environment.
HSBC expects return ratios of private banks to remain under pressure due to slower loan growth, NIM compression and (iii) credit cost normalisation. Weak deposit growth for the system, high loan-to-deposit ratio and tight banking system liquidity should keep loan growth muted, it said. "Change in loan mix towards lower yielding loans, capped LDRs and declining CASA ratios should affect private banks’ NIM. Banks with high exposure to microfinance (MFI) loans should see elevated credit costs. Overall, we estimate PAT for our covered banks to decline by 4 per cent QoQ in 3QFY25. Relatively, in 3QFY25, earnings performance of PSU banks might be stronger than private peers," HSBC said.
For NBFCs, HSBC sees earnings pressure for NBFCs like CreditAccess Grameen Ltd, L&T Finance Ltd and IIFL Finance Ltd due to their MFI exposures. MFI stress may peak in 3QFY25, but the companies’ commentary needs to be evaluated, it said.
"Earnings performance of Bajaj Finance, Cholamandalam Investment and Finance and Shriram Finance should be stronger with higher growth, stability in NIM and credit costs. Asset quality is likely to be the key factor to watch for, especially for NBFCs which are in unsecured segments like Bajaj Finance and for Cholamandalam Finance/ Shriram Finance/ Mahindra Financial to gauge the extent of the downcycle in vehicle finance," it said.
Among its preferred picks, HSBC has a target price of Rs 1,350 on Axis Bank, as it believes the bank is ahead of the curve in digital investments and its focus on improving its share of granular loans should support underlying profitability.
HSBC has a target of Rs 2,130 for HDFC Bank, as it believes the current balance sheet restructuring will pave the way for better growth and profitability over FY26-27.
The foreign brokerage suggested a target price of Rs 1,520 on ICICI Bank and a target price Rs 8,230 on Bajaj Finance.
HSBC maintained its 'Buy' rating on Bajaj Finance, as it expects margin pressures to abate, operating expenses to remain under control and credit costs to gradually improve. It believes that ICICI Bank's strong capital position, wide branch network, execution in growing the nonmortgage part of the retail loan book, along with branch expansion, position it to deliver better-than-expected outcomes.
For Shriram Finance, the target stands at Rs 3,725. HSBC said the demand recovery outlook remains positive and the valuation at the current price is attractive.