Indian banks are likely to deliver a strong 18 per cent earnings‑per‑share growth in fiscal 2027‑28, driven by nearly 15 basis‑point rise in margins, supportive macro conditions and attractive valuations, a new report has said.
The report from Macquarie Equity Research said the firm has raised its total tightening assumption to about 75 basis points of rate hikes over the next nine to 12 months.
The hike is increasingly likely as the US Federal Reserve enters a tightening cycle, supporting further margin expansion.
The report noted that insurance firms have underperformed and offer good value as regulatory concerns have been priced in.
PSU banks should benefit from new Foreign Currency Non-Resident [FCNR(B)] inflows, while asset quality remains stable. Higher rates should support margins and buffer Expected Credit Loss (ECL) costs.
“We see significant re-rating potential, given undemanding valuations of 1.3-fold FY28E P/B and 10-fold P/E. Private banks should deliver strong EPS growth in the next two years as margins improve and operating expenses and credit costs fall,” the report said.
The macroeconomic backdrop remains supportive as liquidity constraints eased after FCNR mobilisation. Loan demand is robust and broad-based, while asset quality remains healthy, and rate increases appear imminent, the report said.
The report predicted ROA above 1 per cent and ROE of 13–15 per cent for PSU banks and upgraded Bank of Baroda considering reasonable valuations and resilient core profitability despite the one-off NMC case.
Despite healthy loan growth, a rate increase could pressure margins for NBFCs. 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 of NBFCS appear more reasonable,” the report noted.
