Motilal Oswal favors private banks for better performance

Motilal Oswal Financial Services (MOSL) favors private banks over public ones. They believe private banks will perform better because of stronger financial health and potential earnings recovery. Although FY25 was tough for the banking sector, MOSL thinks private banks will outpace public banks in earnings growth through FY27. The Bank Nifty index had only a 2.6 percent return this year, while the Nifty 50 index had a 0.8 percent gain. Despite these challenges, some banking stocks saw significant increases. For example, HDFC Bank rose by 18 percent, and ICICI Bank grew by 16 percent. MOSL anticipates that earnings might slow in the first half of FY26 but could recover later in the year. MOSL pointed out that public sector banks (PSBs) have peaked in profitability, leaving little room for further growth. They believe private sector banks (PVBs) are better positioned for growth because of healthier balance sheets and improving earnings. The valuation gap between PVBs and PSBs is narrowing, making PVBs more appealing. During FY22-25, PSBs had strong earnings growth, averaging 38 percent. However, MOSL predicts that PVBs will grow faster from FY25 to FY27, reversing past trends. Some mid-sized private banks lowered their growth forecasts due to high competition and a decrease in unsecured loan growth. Larger banks are also facing slow growth, affected by rising costs and changes in profit margins. MOSL expects net interest margins to face pressures in the first half of FY26 but sees potential for recovery in the latter half as costs stabilize. They see private banks like ICICI Bank, HDFC Bank, and Kotak Mahindra Bank as solid investment choices. For public sector banks, MOSL is cautious about their earnings outlook. They expect growth among PSBs to slow significantly. The brokerage estimates an earnings growth of only 8 percent for PSBs from FY25 to FY27. Despite challenges, MOSL remains positive about PVBs for FY26. They highlight the stronger financial position and better growth prospects of private banks compared to public ones, which may face more significant obstacles ahead. Investors are advised to consult financial experts before making any decisions based on this information.