Macquarie Capital is shifting its preference toward non-banking financial companies (NBFCs) over traditional banks for the near term. The firm highlights that while NBFCs are delivering resilient earnings and stable margins, banks are currently struggling with persistent margin pressure and slowing deposit growth. Investors are tracking how upcoming RBI regulatory updates and deposit costs might shape the performance of both sectors.
Macquarie Capital’s financial research team, led by Suresh Ganapathy, has adopted a cautious stance on banks, shifting its preference toward non-banking financial companies (NBFCs) for the near term. This strategic view is based on the recent quarterly earnings performance, which showed that while many NBFCs managed to maintain steady profit margins, the banking sector is facing increasing difficulty.
Why NBFCs Appear Resilient
The research indicates that NBFCs have demonstrated stronger earnings resilience, with many exceeding market expectations in the recent quarter. Even with potential regulatory changes from the Reserve Bank of India (RBI)—such as new guidelines on revolving credit—NBFCs are expected to maintain stable margins and keep operating costs under control.
Analysts note that because NBFCs often have a healthy pipeline of loans and disciplined spending, they remain well-positioned for consistent growth. The firm has highlighted specific lenders like Shriram Finance and Aditya Birla Capital as preferred picks, given their ability to manage consistent asset growth and maintain stable earnings, even if total loan growth moderates slightly.
Banking Sector Challenges
Traditional banks, in contrast, are dealing with significant headwinds. The most prominent challenge is persistent margin pressure, as banks struggle to keep the difference between the interest they earn on loans and the interest they pay on deposits stable. High deposit costs are making it difficult for banks to grow their loan books as rapidly as in previous periods.
For instance, even large public sector lenders like the State Bank of India (SBI) are seeing a moderation in loan growth. Management at several banks has had to revise loan growth guidance downward to reflect the ongoing difficulty in gathering new deposits. The banking sector’s net interest margins, a key measure of profitability, have seen compression compared to the previous year, leaving investors cautious about near-term recovery.
Sector Picks and Regulatory Outlook
Within the broader financial space, Macquarie continues to favor specific names based on their competitive positioning. Among large private banks, ICICI Bank is noted as a preferred choice, while City Union Bank remains a favorite in the smaller private bank segment. In the insurance space, Life Insurance Corporation of India (LIC) is highlighted as a superior choice over peers, supported by the recent government stake sale and a focus on embedded value, despite concerns about regulatory caps on commissions.
For investors, the key area to monitor will be how the RBI’s final stance on revolving credit and liquidity guidelines affects the overall financial sector. Any potential changes in how supply-chain and inventory financing are classified could influence how much credit these companies can extend. Additionally, the ability of banks to lower their deposit costs and improve mobilization will be a critical factor in determining whether the margin pressure begins to ease in the coming quarters.