Global brokerage Macquarie sees significant re-rating potential for the banking sector stocks. It expects private banks to deliver strong EPS growth in the next two years as margins improve and operating and credit costs fall. Public sector banks are expected to benefit from new FCNR inflows while their asset quality remains stable.

It expects an FY28 EPS growth of 18% for domestic banks. The brokerage has upgraded six companies in the banking and insurance sector.

Macquarie on banks: 2 stocks upgraded

The brokerage has upgraded both Kotak Mahindra Bank and Bank of Baroda to ‘Outperform’ from ‘Neutral’. 

It has raised its target price for Kotak to Rs 500 from Rs 455, implying an upside of nearly 21% from its current level. “The bank remains well positioned to deliver a 2% RoA and 17% loan growth, while its sector-leading capital position provides valuable flexibility in a potential rate-hike cycle. The appointment of a new CEO remains the key potential rerating catalyst,” the brokerage added. 

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“The macroeconomic backdrop remains supportive: post-FCNR mobilisation has eased liquidity constraints, loan demand is robust and broad-based, asset quality remains healthy, and rate increases appear imminent,” Macquarie added, pointing out the key triggers for private banks.

Bank of Baroda’s target price has been increased to Rs 280 from Rs 270 earlier, reflecting an upside of around 20%. Macquarie upgraded Bank of Baroda as it considers valuations as reasonable and expects resilient core profitability.

Macquarie on NBFCs: M&M Financial, LIC Housing Fin upgraded

“Loan growth should remain strong, but a rate increase and higher bond yields should raise borrowing costs and pressure near-term margins. Asset quality is another risk, particularly for unsecured MFI and personal loans if inflation persists. However, most NBFCs are well capitalised and adequately provisioned. Following solid execution and valuation consolidation among some larger names, valuations appear more reasonable,” the brokerage said. 

Among NBFCs, the brokerage has upgraded Mahindra & Mahindra Financial Services to ‘Outperform’ from ‘Underperform’. LIC Housing Finance was upgraded to ‘Outperform’ from ‘Neutral’. Mahindra & Mahindra Financial’s target price has been raised to Rs 395 from Rs 270, implying an upside of over 21% from the current level. LIC Housing’s price target has been increased to Rs 660, an over 22% upside from current levels.

Macquarie on insurance: Prefers LIC, upgrades ICICI Pru

It prefers LIC in this sector, given the removal of the government stake-sale overhang, improving margins, and lower exposure to the Insurance Regulatory and Development Authority’s proposed changes to commission limits.

The brokerage has upgraded ICICI Prudential Life Insurance to “Outperform” from “Neutral”, with a target price of Rs 540. This implies an upside of around 22% from current levels.

‘ULIP taxation, surrender-value rules, and GST ITC ineligibility have already affected valuations, while recent commission regulations could constrain FY28E growth. Insurers have de-rated significantly and now trade at attractive levels,” it said.

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Macquarie on fintech: Upgrades Paytm

Macquarie has upgraded Paytm parent, ONE 97 Communications, to ‘Outperform’ from ‘Neutral’ with its target price raised to Rs 2,025 from Rs 1,235. The revised target price implies an upside of 20% from the current levels.

Macquarie on PB Fintech

However, IRDAI’s proposal is expected to hurt one company the most, PB Fintech. Macquarie has now downgraded the stock to ‘Neutral’ from ‘Outperform’ and lowered the target price by 41% to Rs 1,150.

The stock has lost around 43% since the proposal was outlined. “We downgrade the stock on account of sharp EPS cuts following the IRDA commission caps consultation paper. We now believe FY27 EBITDA could be achieved in FY30 accounting for 2 years of pain post implementation of IRDA regulations after the sharp cut in FY28,” Macquarie said.

Macquarie on financial sector stocks: The winners and losers

Overall, Macquarie’s report covers the current dynamics across the financial sector starting from banks to fintechs. They believe that though the macro-economic environment remains supportive, broad-based triggers like asset quality remain a critical measure of long-term investment opportunity in the stocks.

Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.