Aggarwal believes these large banks are navigating the current phase of the cycle more effectively, with the impact of net interest margin (NIM) compression easing significantly.
In terms of asset quality, major banks like ICICI and HDFC are demonstrating stable performance. The challenges observed are primarily confined to unsecured segments, particularly microfinance institutions (MFIs) and credit cards, affecting select mid-sized banks.
These trends are expected to persist, leading to a moderate rise in overall credit costs. However, return on assets (ROAs) for large banks should remain strong.
Aggarwal sees potential in vehicle financiers due to reasonable valuations and expected improvement in utilisation levels and demand. Shriram Finance and Cholamandalam Finance may witness margin recovery over the year.
Motilal Oswal Financial Services expects industry credit growth to be around 10.50-11% this year, with a slight improvement to 11.50-12% next year. Aggarwal said, “Deposit is something that continues to remain a challenge for the overall sector, and the credit-deposit (CD) ratios for many banks still remains elevated.”
Public sector banks have optimised their balance sheets, with CD ratios reaching around 75 for many, while some, like Bank of Baroda, are already in the early 80s.
Loan growth will continue to be influenced by deposit trends. Regulatory measures, including the reduced repo rate and government initiatives in the Budget, may drive some consumer demand, but overall growth is expected to remain controlled, with only a slight increase in FY26 compared to FY25.
In a brokerage note, MOSL, maintains cautious stance on banks with high exposure to microfinance institutions due to margin pressures, slower business momentum, and elevated credit costs.
Private sector banks are expected to register an earnings CAGR of 13.9% for FY25-27E, while public sector banks are projected to grow at a CAGR of 8% over the same period.