IGI Logo

Asia roadshow takeaways: Blend of caution and optimism.

We spent three days in Asia meeting with investors to discuss emerging themes and top ideas within the banking space. In this report, we highlight key insights and debates from the meetings, including sector trends, stock-specific discussions, and potential opportunities.

Earnings recovery, margins, and top picks – Is the banking sector heading for an earnings revival?

* The consensus across meetings was that the sector is approaching an earnings inflection point, with growth expected to recover from 2H onwards as margin pressures gradually ease.

* However, concerns persist around near-term softness in NIMs and a potential earnings deceleration in 1Q/2QFY26.

* Among large caps, investors continue to favor steady compounders like ICICI Bank and HDFCB for their resilience and consistency, while selectively evaluating Axis Bank and IDFC First Bank following their significant underperformance.

Margin remains the most focused metric – Broad consensus on NIMs bottoming out by 3QFY26

* NIMs are likely to contract amid the rate cut cycle. Banks with a high proportion of floating-rate books, particularly those linked to repo rates, are expected to witness immediate pressure on asset yields.

* While deposit costs are expected to ease gradually, the pace and asymmetry of repricing remain key uncertainties amid the continued quest for deposits.

* Investor views were divided on how long margin softness may persist, though most agreed that larger, better-managed banks are likely to see NIMs bottom out by 3QFY26, followed by a gradual recovery thereafter.

Sharp rally in mid-sized banks makes FIIs more conscious of opportunity costs!

* The sharp rally in select mid-sized banking names like AUBANK and RBL Bank— with returns of 60-65% over the past quarter—has made investors more conscious of the opportunity cost of remaining invested in larger banks.

* This, in turn, has increased interest in more active fund management, with investors closely evaluating opportunities in the mid-sized banking space.

* However, many investors are evaluating their holdings in AUBANK after >60% return over the past quarter, as the stock now trades at 2.8X FY27E P/ABV. While hopes are pinned on the bank securing a universal banking license, several investors continue to contemplate its return potential from current levels—even if the license is granted—and its ability to outperform peers.

Valuations shaping investor preferences – AXSB and IDFCF remain preferred turnaround plays!

* Valuation discussions were centered around undervalued franchises like Axis Bank and IDFC First Bank, both of which have underperformed over the past two years but appear attractive as their earnings growth trajectory is expected to recover from 2HFY26 onwards.

* ICICI Bank and HDFC Bank remain core portfolio holdings, valued for their consistent returns, robust asset quality, and diversified income streams.

* Several investors are revisiting SBI as a strong investment candidate, as the stock has lagged the broader PSU Bank rally, leading to a sharp reduction in the valuation premium that SBI has typically traded vs peers.

* Bandhan Bank witnessed mixed interest, as near-term challenges over MFI asset quality and margins are expected to persist. However, the bank holds potential to deliver >1.5% RoA once MFI-related stress subsides.

PSU banks: Can the outperformance continue? SBI remains the preferred play

* The sharp rally in PSU banks—led by names like Union Bank, Canara Bank, and Indian Bank, which have risen by 25-30% in recent months—has sparked active debate on whether investors should revisit the PSU banking space and if the outperformance can sustain over the medium term.

* Several investors noted that SBI, despite its scale and strong fundamentals, has lagged the broader PSU rally, making risk-reward appear attractive. The stock's relatively undemanding valuation and stable RoE trajectory were viewed favorably.

* At MOFSL, following the recent dislocation in PSU bank stock prices, we find the risk-reward attractive in SBI and continue to maintain it as our preferred pick in the PSU banking space.

Concerns around execution and earnings visibility for mid-sized private banks

* IDFC First Bank has witnessed renewed interest, particularly after Warburg Pincus came on board. However, some investors remain concerned about the bank’s execution capabilities, cost control, and its ability to deliver a healthy ROA/ROE trajectory.

* IndusInd Bank drew mixed views—while some saw the recent sell-off as overdone, many others remain cautious until clearer signs of RoA rebound emerge under the new management leadership.

* Bandhan Bank remained on the sidelines for many funds due to sharper-thanexpected margin pressures and concerns around weak asset quality and growth outlook.

Beyond banking: Which segments are seeing higher investor focus?

* Some funds showed interest in non-lending opportunities within financials, such as asset management and insurance, where structural growth remains intact. Stocks like UTI AMC and Niva Bupa were discussed in this context.

* NBFCs with differentiated models and ability to sustain healthy growth and earnings—supported by margin expansion—are also seeing selective interest. Preferred ideas: Shriram Finance, PNBHF, Home First, AB Capital, and LTFH

Valuation and view

While the sector may undergo some near-term consolidation due to margin and growth concerns, a gradual recovery in NIMs and loan growth—alongside stable asset quality—is expected to support improved performance over the medium term. We prefer banks with superior deposit franchises and prudent risk management practices. Normalization of credit costs in unsecured segments, a healthier asset mix, and improved treasury performance will help banks maintain a healthy RoA despite macro and rate-related challenges. We remain constructive on the sector and expect earnings recovery from 2H onwards. Top picks: ICICI Bank, HDFC Bank, and SBI. We remain watchful of potential turnarounds in Axis Bank and IDFC First Bank and await more clarity from the upcoming results.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412