Brokerage Emkay Research has reduced its financial sector allocation to 25%, favoring smaller private banks and NBFCs over large lenders. The move reflects concerns about structural challenges for industry giants, while mid-sized players are expected to see better earnings growth through FY27.
Emkay Research has adjusted its investment strategy for the Indian financial sector, moving capital away from large private and public sector banks. In a recent analysis, the brokerage cut its sector allocation to 25% from 29%, citing limited growth potential for the industry's largest lenders. Instead, the firm is realigning its model portfolio to prioritize smaller private banks, specific Non-Banking Financial Companies (NBFCs), and capital market intermediaries.
Structural Challenges for Large Banks
The report indicates that the high-growth phase for large private banks may be concluding. Emkay points to several hurdles, including increased competition from fintech firms in areas like payments and unsecured lending, and the rising trend of companies raising funds directly through bond markets. These factors, combined with limited room for further market share expansion, have led the brokerage to suggest that these stocks may currently be trading at valuations that do not fully account for these structural pressures.
Earnings Outlook for Smaller Lenders
In contrast, small and mid-sized private banks are viewed as having stronger earnings momentum. Emkay suggests that these institutions are likely to benefit from improved asset quality and higher profitability as they move through the current cycle. The brokerage highlighted lenders such as IDFC First Bank and RBL Bank, noting that they could see better return on assets over the next two to three years. The overall banking sector is projected to see a cyclical recovery by FY27, with earnings growth estimated at 15% following a period of single-digit expansion.
Shifts in NBFC and Capital Market Picks
Within the NBFC space, the brokerage has updated its portfolio, bringing in Mahindra & Mahindra Financial Services, replacing Shriram Housing Finance. This change is driven by the expectation that the automobile financing cycle will recover, providing a boost to the company.
For the capital markets sector, Emkay remains optimistic about the long-term trend of household savings shifting into equities, which benefits asset managers and wealth firms. As part of this view, the brokerage switched its preference within the asset management space from ICICI AMC to Aditya Birla Sun Life AMC.
Conversely, the firm maintains a cautious stance on public sector banks, citing the potential impact of expected credit loss norms and lower treasury gains. Investors should continue to monitor how these mid-sized banks manage their loan growth and asset quality, as these will be critical factors in determining whether the projected earnings recovery materializes as expected through FY27.