In a note dated July 6 and authored by Seshadri Sen and his team of analysts, Emkay explains that they have gone “underweight” on the financial theme and have cut their exposure to the entire sector to 25% from 29% earlier.
For large private banks, the brokerage explains that the rising competition has ended the hyper-growth period for such lenders and that they are unlikely to gain meaningful market share from here.
“The recent rally has pushed multiples back above fair value and we see a time correction ahead,” Emkay’s note said, adding that despite this, it still expects a strong, cyclical earnings recovery for lenders in financial year 2027, led by a reviving credit cycle and bottoming margins.
Emkay believes that largecap bank valuations are still above the fair-value zone, despite the multi-year de-rating that the sector has gone through. Therefore, it remains cautious on the space, as the market continues to extrapolate past some of the hyper growth, despite the structural downward shift in growth.
“The re-rating potential lies inn franchises with a credible RoA-repair path,” Emkay’s Sen wrote in his note.
How Is Emkay Playing The Financial Theme?
Emkay said that it prefers playing the sector through small and mid-sized banks, along with NBFCs, and capital market stocks, which is another sector of preference.
The brokerage said that Small and Mid-sized private banks offer the clearest RoA-recovery story, backed by improving CASA and a turnaround in asset quality, while capital market intermediaries benefit from a structural shift in household savings towards equities.
Emkay has made a complete exit from its exposure to HDFC Bank and has also switched its NBFC exposure to Mahindra & Mahindra Financial Services from Shriram Finance, as it sees a strong re-rating potential in the former.
Within the Asset Management theme, it has switched its exposure from ICICI Prudential AMC to Aditya Birla Sun Life AMC, as a more high-beta exposure, in-line with its constructive view on the market.
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