Indian Banks Poised for 18% EPS Surge by FY28

Macquarie anticipates a significant earnings recovery for Indian banks, projecting an 18% growth in Earnings Per Share (EPS) by FY28. This optimism is underpinned by several factors including a projected 15 basis points rise in margins and strong loan demand. The brokerage's analysis highlights that private banks are expected to lead this growth over the next two years.

The supportive macroeconomic backdrop includes easing liquidity pressures, which have been alleviated by FCNR deposit mobilization. Asset quality is expected to remain stable, and Macquarie is factoring in approximately 75 basis points of rate hikes in the coming 9-12 months, which could further bolster bank margins.

Macquarie has upgraded several key financial stocks. Bank of Baroda received an 'Outperform' rating from 'Neutral', while Kotak Mahindra Bank was also upgraded, with Macquarie noting its strong positioning despite concerns about deposit mobilization. Preferred names also include ICICI Bank, State Bank of India, and City Union Bank.

For non-bank financial companies (NBFCs), Macquarie foresees healthy loan growth, though rising rates pose a risk to borrowing costs and near-term margins. Asset quality in specific segments like unsecured loans remains a concern if inflation persists. Nonetheless, most NBFCs are considered well-capitalized. Mahindra Finance and LIC Housing Finance saw upgrades to 'Outperform'.

In the fintech sector, Paytm was upgraded to 'Outperform' due to stronger revenue growth and cost control. However, PB Fintech was downgraded to 'Neutral' following earnings estimate cuts. In insurance, Macquarie sees attractive valuations, with LIC named as a preferred insurer due to improving margins and reduced regulatory exposure.