Highlights
- Nitin Aggarwal said that while the broader macro environment remains uncertain.
- Aggarwal believes valuation corrections in private banks have made them compelling.
- According to Aggarwal, investors should focus on growth-orientated NBFCs, particularly in vehicle financing.
India’s banking sector remains resilient despite macro uncertainity and competitive pressures. In an exclusive interview with ET Now, Motilal Oswal’s Nitin Aggarwal shares insights on the PSU vs private bank debates, credit growth trends and sector valuations.
Banking sector earnings recovery underway
Nitin Aggarwal said that while the broader macro environment remains uncertain, the banking sector’s earnings outlook remains healthy.
“While there is a lot of macro noise around and we are in a very uncertain environment, banking earnings overall are still on a decent footing. We expect recovery in earnings growth as credit growth gains traction and asset quality remains stable,” he said.
Over the past 12–18 months, banks’ earnings have witnessed fluctuations due to declining margins. However, stable credit demand and strong asset quality are expected to support earnings going forward.
PSU banks regaining market share
In the past decade, public sector lenders had steadily lost ground to private banks. Between FY11 and FY21, PSU banks lost nearly 20 per cent market share in the banking system.
However, the trend has started reversing in the last two years.
“In FY25 and FY26 we have seen PSU banks marginally gaining market share. Many of them are now comfortable deploying liquidity and are showing stronger loan growth,” Aggarwal noted.
Better capitalisation, improved earnings figures, and strong balance sheets are helping PSU banks remain on this growth trajectory.
Why do private banks still look attractive?
Despite PSU banks gaining market share, analysts believe private sector banks still offer attractive investment opportunities, particularly among large lenders.
Private banks are currently trading at around 2–2.5 times book value, compared with PSU banks that often trade around or below one time book value.
However, Aggarwal believes valuation corrections in private banks have made them compelling.
“Large private banks have not delivered much return this year, which has corrected valuations to levels aligned with their return profiles. That makes some of these names attractive from here,” he added.
Aggarwal highlighted leading lenders such as:
According to Aggarwal, these banks are expected to report stronger growth from FY27 onwards as loan growth picks up and balance sheet adjustments stabilise.
Asset quality risks remain limited
Another major positive for the sector is the improvement in asset quality, particularly among PSU banks.
Earlier, public sector lenders struggled with high levels of non-performing assets (NPAs), but the situation has improved significantly.
“There is no major asset quality risk at this point. Provision coverage for PSU banks is actually higher than private banks today, and credit costs remain well under control,” Aggarwal said.
He added that recoveries remain strong and incremental loan slippages are contained, suggesting that credit costs should remain manageable in FY27 as well.
NBFC Space: selective opportunities
The non-banking financial company (NBFC) segment has also witnessed valuation corrections after a strong rally.
According to Aggarwal, investors should focus on growth-orientated NBFCs, particularly in vehicle financing.
“Margin expansion opportunities may be limited now, but we still see growth in some vehicle finance businesses. We remain selective in the NBFC space,” he said.
He cited companies such as the following:
While Bajaj Finance has corrected significantly, analysts believe the outlook could improve if credit growth remains healthy and asset quality stays stable.
Lending market becoming highly competitive
Competition in the lending market has intensified across both PSU and private banks.
Banks are witnessing strong corporate loan demand, and the fourth quarter is typically a seasonally strong period for credit growth.
However, margins may remain range-bound due to rising deposit costs.
Still, he expects margins in FY27 to be slightly better than FY26, though the pace of expansion may be slower than earlier projections.
Larger banks preferred over smaller lenders
While smaller banks could benefit from faster growth cycles, analysts currently prefer larger and more stable lenders, he said.
This is partly because segments such as microfinance and unsecured lending have faced challenges in recent years.
Some mid-sized banks could see improvement as the microfinance cycle normalises, but execution risks remain.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)
