Expert Analysis: MOFSL's Top Banking Stock Picks
Motilal Oswal Financial Services (MOFSL) has released its latest report on the Indian banking sector, highlighting several key players as top stock picks. ICICI Bank Ltd leads their recommendations, closely followed by HDFC Bank Ltd, State Bank of India (SBI), and AU Small Finance Bank (AU SFB). The brokerage firm anticipates that mid-sized banks are poised to outperform their larger counterparts in terms of earnings growth, a trend driven by improving margins, a reduction in stress within unsecured portfolios, and stable credit costs.
Private vs. PSU Banks: A Shifting Landscape
Consensus estimates point to a significant rebound in overall banking sector earnings for FY27, with a projected year-on-year growth of 13 percent, reaching an aggregate of Rs 3.9 lakh crore. This growth is expected to be bolstered by a 14 percent increase in net interest income (NII). MOFSL forecasts that private banks will notably outperform public sector banks (PSUs), with private sector earnings predicted to surge by 21 percent in FY27. In contrast, PSU banks are expected to see a more modest 4.2 percent growth, marking FY27 as a transitional year after nearly three years of relative outperformance by PSUs.
Earnings Upgrades and Downgrades Across the Sector
The report notes a mixed bag of earnings estimate revisions across the sector. Mid-sized private banks, which previously experienced the steepest downgrades due to higher exposure to unsecured retail and microfinance (MFI) segments, are now showing signs of improvement. Over the past three months, select banks have received earnings upgrades, with Bandhan Bank, IndusInd Bank, and AU Bank seeing upgrades of 3 percent, 10-16 percent, and 1 percent, respectively. Conversely, IDFC First Bank and RBL Bank have witnessed significant downgrades of 14 percent and 21-27 percent.
For larger private banks such as ICICI Bank, HDFC Bank, Axis Bank Ltd, and Kotak Mahindra Bank Ltd, earnings estimates have largely remained stable, with minimal downward adjustments. Among PSU banks, MOFSL's earnings estimates for Punjab National Bank (PNB), Indian Bank, and Union Bank are 2-27 percent higher than consensus, while their SBI estimate for FY28E is 3 percent below consensus.
Outlook for FY27-28
Overall, MOFSL maintains a positive outlook for the banking sector, with its aggregate FY27-28 earnings estimates for the sector broadly 1-2 percent higher than street expectations. For PSU banks specifically, their aggregate earnings estimates are 1.5 percent ahead of consensus. Investors considering Indian banking stocks should consult with a qualified financial advisor before making any investment decisions.