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4Q review: A bit of everything across the financial landscape

Lenders are holding ground in 4QFY25: (1) Banks and NBFCs: Overall trends are unchanged for banks, with pressure on revenue growth continuing, led by weak NII growth and slower loan growth. Asset quality remains under control, led by lower slippages. Maintain an unchanged outlook on NIM, growth and asset quality for the near term. (2) Capital market players have been buoyed by recent market momentum, although stretched valuations leave limited room for further re-rating.

Weak revenue trends with less worrisome asset quality trends

Banks under coverage posted 2% yoy earnings growth, as muted 1% growth in operating profits was cushioned by a ~16% decline in provisions. NII growth was weak at ~2% yoy. Public banks delivered ~7% yoy earnings growth, while it declined 3% yoy for private banks. NII growth was muted at 1% yoy for public banks compared to 6% yoy for private banks. NIM was better than expected but aided by a few one-offs. Growth is still subdued at ~10% yoy, which is a combination of weaker demand and the focus on building a less risky portfolio. Asset quality remains a bright spot for the industry, with slippages still under control at an aggregate level. We may be well past the peak slippages in unsecured loans, while the MFI portfolio should be less worrisome hereon. Lenders are working through multiple ways to ease the NIM pressure, but most of these outcomes suggest likely weak earnings growth in FY2026. We see limited upside in frontline private banks given their sharp outperformance, although we see value in Axis Bank and SBI at this stage.

NBFCs: Bittersweet performance

Stable growth, mixed asset quality trends and falling marginal funding costs summarize 4QFY25 performance of NBFCs under coverage. Growth outlook remains moderate to stable, being mindful of macro developments while being assertive on improving collection efficiency. While funding cost tailwinds are clearly visible, transmission may be swift in some instances, as NBFCs trade margins for growth. We remain positive on the space, with Shriram Finance among the large ones and Aadhar, Home First, Aptus and Five Star as favored picks among the mid-cap names.

Capital markets: Subdued 4Q; promising 1Q

4QFY25 earnings for AMCs were healthy on a yoy basis but declined sequentially, reflecting fall in equity markets (~8% qoq on average). Among AMCs, equity AAUM decline was lower for HDFC/Nippon due to healthy net inflows, reflecting the underlying fund performance. RTAs broadly reflected trends similar to AMCs, except that CAMS was impacted by price revisions (offset by strong non-MF performance), while Kfin reported largely stable performance. Angel One reported better-than-expected results due to cost savings. Ratings revenues were better than expected, offset by weakness in non-ratings. The recent market performance improves the earnings outlook for the sector, but higher valuations also result in a limited scope for further multiple expansion.

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