Banks vs NBFCs: Where to invest after RBI rate hike? Analysts answer

The Reserve Bank of India’s (RBI) decision to hike the repo rate by 25 bps, along with a shift in policy stance to ‘Calibrated Tightening’, could emerge as a positive catalyst for the earnings of larger private banks, PSU banks and housing finance companies (HFCs), Jefferies said in a note.

 

The brokerage sees a slight risk for smaller private banks, NBFCs and life insurers. 

 

"Banks with a higher share of EBLR loans and reasonable domestic LDR could see some positive earnings over next 3-6 months," Jefferies said.

 

Among banks, the higher beneficiaries could be ICICI Bank and Kotak Mahindra Bank as they have higher shares of EBLR loans and manageable LDRs. HDFC Bank and Axis Bank are expected to be mid-range beneficiaries as they have a higher share of EBLR loans but with a higher LDR or higher share of wholesale deposits.

 

 

Small pvt banks, NBFCs face higher risks Smaller private banks and NBFCs could face higher risks due to their greater exposure to fixed-rate or internally benchmarked loans. 

 

Prime HFCs like LIC Housing Finance and Bajaj Housing Finance, select diversified NBFCs like Aditya Birla Capital with higher floating assets vs liabilities can benefit while Mahindra & Mahindra Financial Services, and SBI Cards face risk from rate hikes.  CHECK Stock Market LIVE Updates

 

ICICI Bank, SBI among top picks Jefferies has named ICICI Bank, State Bank of India (SBI) and Axis Bank as its top picks among large-cap banks post RBI MPC outcome.

 

Meanwhile, Rajesh Agarwal, head of research at AUM Capital Market, said that in a rising rate environment, repo-linked loans reprice almost immediately, while deposit costs typically adjust with a lag. This generally expands net interest margins (NIMs), particularly for banks with strong CASA franchises such as HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and SBI.

 

"As a result, banks currently have a clear advantage," he said.

 

According to Gaurav Sharma, vice president & head of research, Globe Capital, large private banks and high quality NBFCs are preferred picks as they have stronger deposit franchises and relatively better liability profiles to absorb higher funding costs.

 

"The rate hike could put pressure on NIMs across lenders, but banks with a higher share of low-cost deposits like CASA and strong pricing power should be better positioned to manage margin compression," he said, adding that his preferred picks within banks are HDFC Bank, ICICI Bank and Kotak Mahindra Bank. Among NBFCs, Bajaj Finance and Shriram Finance remain preferred names due to their diversified franchises and strong funding profiles. 

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