HDFC Bank and Shriram Finance poised to ride sectoral tailwinds; Motilal Oswal sees 12-18% upside scope

The Indian financial sector maintained steady performance in Q4 FY25 despite mixed market conditions. Systemic credit growth moderated to 11.1% YoY across banking and NBFC segments, reflecting prudent lending practices.

The banking sector’s elevated credit-deposit ratio of 80.5% underscores the continued importance of deposit mobilization to sustain growth momentum.

The affordable housing finance segment (HFCs) and gold loan providers (NBFCs) stood out as strong performers, with gold loan AUM growing ~29% YoY. Vehicle financiers (NBFCs) reported stable disbursements, benefiting from their fixed-rate loan portfolios, which saw ~20% YoY AUM growth.

However, mid-ticket mortgage loans (HFCs) and unsecured retail credit (banks/NBFCs) experienced slower growth as lenders exercised caution.

The microfinance sector (NBFC-MFIs), while still facing elevated credit costs ranging from 9–34%, demonstrated improving collection efficiency—particularly in Karnataka, where March collections showed significant recovery.

Net interest margins (NIMs) remained stable across most segments, though gold lenders (NBFCs) and affordable housing providers (HFCs) witnessed modest compression of 10–15 bps due to rising funding costs. Asset quality remained largely stable, with housing finance companies (HFCs) and power financiers (NBFCs) reporting measurable improvements.The sector is well-positioned to benefit from the evolving rate cycle, with potential RBI rate cuts expected to provide lagged benefits over the next 3–6 months.The financial sector is poised for a measured 12% credit growth in FY26, led by secured lending segments. Vehicle financiers (NBFCs) may see NIM expansion from potential rate cuts, while deposit mobilization remains crucial for banks to maintain liquidity.

The microfinance sector could normalize by H2 FY26 if improving collection trends continue. While challenges persist in deposit growth and select asset quality pockets, the sector’s fundamentals remain strong, supported by stable macroeconomic conditions and improving operational trends.

The Nifty Financial Services Index is expected to reflect this resilience, with opportunities emerging in segments demonstrating sustainable growth and prudent risk management.

Stock Picks:
Shriram Finance | Buy | Target: Rs 775 | LTP: Rs 653 | Upside: 18%

Shriram Finance is well-positioned to capitalize on the recovery in vehicle finance, particularly as demand for commercial and passenger vehicles gains momentum. With a diversified lending portfolio, the company is set to benefit from lower borrowing costs, which will enhance net interest margins and profitability.

Its diversified product suite helps mitigate the cyclicality of the commercial vehicle (CV) business. A strong focus on asset quality and collection efficiency indicates that the company is well-prepared to navigate the evolving credit environment. We expect AUM/PAT to grow at a CAGR of 18%/19% over FY24–27.

HDFC Bank | Buy | Target: Rs 2,050 | LTP: Rs 1,817 | Upside: 12%

HDFC Bank is prioritizing profitability over volume, reflected in moderated loan growth (projected at 4%/10%/13% over FY25–27) as it optimizes its credit-deposit ratio and shifts toward higher-yielding retail and commercial assets. Recent deposit growth of 14.1% YoY and a rising CASA ratio (34.8%) signal improved funding stability, supporting margin expansion with NIM recovery expected from FY27.

Asset quality remains robust (GNPA: 1.4%, NNPA: 0.5%) with steady credit costs (~50 bps). By replacing high-cost borrowings with deposits and enhancing operating leverage, RoA/RoE is expected to rise to 1.8%/14.2% by FY27—balancing disciplined growth with sustained profitability.

(The author is Head – Retail Research, Motilal Oswal Financial Services)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)