February 2025

Top Conviction Ideas

Banking, Financial Services & Insurance Dnyanada Vaidya
(BFSI)
Pranav Nawale
Private & Confidential | 1
1
 Banks – Q3FY25 Performance Review
Earnings Growth Weak; Asset Quality Pain in Unsecured Segments Persists
▪ Banks (incl. SFBs) under our coverage reported an in-line performance, delivering a credit growth at ~12% YoY, mirroring systemic growth. This
was owing to the continuous and conscious slowdown visible in the unsecured segments, particularly microfinance, credit cards and personal
loans, as asset quality concerns continued to haunt. Credit growth was primarily driven by Retail and SME portfolios, while banks continued to
remain aloof in pursuing corporate growth given pricing pressures. With macro headwinds and asset quality uncertainties, most managements
have refrained from giving credit growth guidance for FY26E.
▪ Deposit growth during the quarter was soft, with competitive intensity remaining high. Deposit growth was mainly driven by TDs, while CASA
deposits de-grew QoQ, weighing on CASA ratios for majority banks. During the quarter, banks started to shift their focus towards mobilising CASA
Deposits and have refrained from indulging in irrational TD pricing to maintain CoF, anticipating a rate cut.
▪ NIMs for most banks moved with a slight negative bias during the quarter, primarily driven by (i) the continued repricing of deposits driving CoF
higher, (ii) regulatory-mandated reclassification of penal interest as penal charges, (iii) elevated slippages from the unsecured pool (specifically for
lenders with higher exposure to the stressed segments), resulting in higher interest reversals, and (iv) Shift in the portfolio mix towards lower-
yielding segments or slower growth in better-yielding segments. Thus, NII growth for our under-coverage banks was marginally below our
expectations at 7/1% YoY/QoQ.
▪ Fee income growth was in line with business growth. Treasury income for most banks was weak, weighing on operational profitability. Opex
growth was modest, with conscious efforts to keep Opex ratios under check, especially amidst slower business growth. Collectively, these factors
weighed on PPOP, which grew by 12% YoY and de-grew by 8% QoQ (lower vs. our estimates by ~5%).
▪ The stress in the personal loans, credit card and microfinance portfolios continued to keep slippages elevated. Asset quality for most
banks remained stable QoQ, barring a select few, with support from healthy recoveries. Credit costs continued to remain elevated for banks
(mainly SFBs) with higher exposure to unsecured segments, primarily microfinance. Earnings growth decelerated, de-growing at 4% QoQ in
Q3FY25.
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 NBFCs – Q3FY25 Performance Review
Asset Quality Concerns in Certain Segments Persist; Growth Momentum Calibrated
▪ During the quarter, disbursement momentum improved for vehicle financiers and diversified financiers, while microfinanciers continued to grow in
a calibrated manner. Owing to political factors, disbursement growth momentum was hampered for housing financiers under our coverage. Our
under-coverage NBFCs (across financiers) reported a healthy AUM growth of 23/5% YoY/QoQ, largely in line with our estimates. Within our
coverage universe, Vehicle Financiers/Housing Financiers/Diversified Financiers/Microfinanciers/Gold Financiers reported 23/12/28/6/14% YoY
AUM growth.
▪ Margins trends remained divergent, with diversified financiers and vehicle financiers reporting largely steady or slight improvement in
NIM trends (ex-Shriram Finance owing to excess liquidity) led by stable CoF. On the other hand, housing financiers, microfinanciers and
gold financiers reported a sharp deterioration in NIMs, driven by yield pressures (slower growth and higher slippages) and an inch-up in CoF.
Thus, despite in-line AUM growth, NBFCs under our coverage reported NII growth of ~19/4% YoY/QoQ in Q3FY25, marginally lower than our
estimates owing to sharper-than-expected NIM contraction for certain financiers.
▪ Collection Efficiency (CE) ex-MFI has been broadly stable with a positive bias QoQ; however, it continues to remain slightly below normalised
levels. CE in the CV segment improved marginally. However, the pace of improvement has been lower compared to a strong improvement
generally visible in Q3 historically. The concerns around the asset quality of Microfinanciers continued to remain elevated, with collections
remaining below par, though slightly better or at par vs Q2FY25. Most microfinanciers have indicated that fresh PAR accretion has peaked-out,
with trends expected to reverse from Q1/Q2FY26 onwards. Continued asset quality concerns kept credit costs elevated, dampening the pace of
earnings. Credit costs for our coverage NBFCs increased significantly by 65/18% YoY/QoQ, resulting in a miss on our earnings estimates.
Earnings (ex-one off gains in Shriram Finance) for our coverage NBFCs (across financiers) de-grew by ~1/4% YoY/QoQ.

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 Diversified Financials – Q3FY25 Performance Review
Mixed Quarter; Credit Card Players Remain Underperformers
▪ For Credit Card Issuers (SBICARD), the collection efficiency trends have improved in Q3FY25. The company has witnessed a reduction in
the flows into delinquencies and the delinquency trends in the new customer acquisitions. This can be credited to the several steps
taken to strengthen the new customer acquisition and the underwriting and portfolio management framework to tackle the rising stress in the
credit card portfolio. SBIC has also seen green shoots on recoveries from written-off accounts, which have improved in Q3FY25 vs Q2FY25.
Thus, with positive trends continuing on asset quality metrics, SBIC expects credit costs to moderate, driving earnings growth. The impact of
the festive season was visible on operational performance.
▪ Life Insurer (SBILIFE) reported a good quarter reporting strong APE growth of 13/30% YoY/QoQ during the quarter. In Q3FY25, VNB
margins (calc.) stood at 26.9% despite a higher share of ULIPs. The full impact of margins re-pricing of certain non-PAR products visible in
Q3FY25 and the launch of protection products helped SBILIFE partially offset the impact of higher ULIPs in the product mix. While the Banca
channel will continue to dominate the distribution mix, the agency channel will continue its strong growth trajectory. Since there has been no
clarity from the regulator on the restrictions on the Banca business being limited to 50%, the company’s focus on the agency channel could
take care of any such contingency.
▪ Asset Management Company (NAM) reported a healthy MF QAAUM growth of 51/4% YoY/QoQ while continued market share gains across
segments. The net flows in Jan’25 haven't shown any signs of distortion and stay at par with Dec’24 trends. While SIP closures were higher in
Dec’24, NAM performed better than the industry, with lower SIP discontinuations. This can be credited to the retail-focused, fragmented
customer, ensuring better customer retention. During the quarter, NAM launched two new products in the index fund category to further
augment the company's passive offerings.

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 Q3FY25 PERFORMERS – WINNERS AND LOSERS

HITS MISSES

ICICI BANK IDFC FIRST BANK

HDFC BANK KARNATAKA BANK

KOTAK MAHINDRA BANK EQUITAS SFB
Banks
DCB BANK BANDHAN BANK
CITY UNION BANK IDFC FIRST BANK

BAJAJ FINANCE SBI CARDS

NBFCs and CREDITACCESS GRAMEEN

CHOLAMANDALAM INV & FIN
Diversified (▼ Rating Downgrade)
Financials MAS FINANCIAL CANFIN HOMES
SBI LIFE MANAPPURAM FINANCE
** Based on Q3FY25 Performance
Private & Confidential | 5
 BFSI Sector Outlook

The Way Forward for

✓ With the competitive intensity amongst banks continuing to remain high, we expect an enhanced focus on deposit
mobilisation to continue by banks. Managements have highlighted that banks will avoid irrational deposit pricing while
anticipating the rate-cut cycle to begin. With the interest rate cycle reversing after a 24-month pause on rates, we do not
expect an immediate downward repricing of deposits, especially given the tight liquidity conditions.
✓ Amidst stress persisting in the unsecured segments – credit card, microfinance and personal loans and demand
weakening in certain pockets, we believe banks would continue to exercise caution and thus expect banks to exit FY25 with
credit growth ranging between ~11-12%. A clear focus area remains to maintain a balanced LDR; hence, deposit growth
will also mirror credit growth. We expect our under-coverage banks (incl SFBs) to deliver a steady credit growth of ~14%
CAGR over FY25-27E against a deposit growth of ~14% CAGR over the same period, thereby maintaining a steady
incremental LDR.
✓ With the RBI reversing the interest rate cycle in Feb’25, the impact on Q4FY25 NIMs will be limited, and the impact in its
Banks entirety will be visible from Q1FY26 onwards. The RBI’s action in its Apr’25 MPC meeting will be keenly eyed. Pvt. Banks
are likely to face higher margin pressures, with a bulk of their book being EBLR linked. On the other hand, PSU Banks
remain fairly insulated, given a higher share of MCLR-linked loans (as repricing happens with a lag). Similarly, SFBs are
expected to benefit in the rate cut cycle given a higher share of fixed-rate loans. Most banks continue to prioritise margins
over growth.
✓ Asset quality concerns will continue to trouble lenders with higher exposure to troubled unsecured segments for the
next couple of quarters. However, the asset quality metrics in the secured portfolio continue to hold up well. We expect credit
costs for MFI-dominant banks to remain elevated in the near term.
✓ At this juncture, we would prefer banks with promising growth prospects, healthy deposit franchises, stable asset quality
metrics and strong and steady management teams.
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 BFSI Sector Outlook

The Way Forward for

✓ Stress in the microfinance sector is likely to have peaked out and should recede over the next 2 quarters. Microfinanciers
appear fairly confident of growth normalisation from H2FY26 onwards. However, with the new MFIN guardrails applicable
from Apr’25, we would watch out for any additional stress that might spill over. With capacity utilisation showing a gradual
improvement trend, we expect vehicle financiers to resume their growth momentum, though with caution. Additionally, the
recent budgetary announcements with rate cut tweaks are likely to support retail demand. We pencil in healthy
AUM growth of ~22% CAGR over FY25-27E.

✓ Backed by expectations of growth in the unsecured (better yielding) segments gradually picking up along with rate cut, we
could expect positive movement on NIMs for credit card issuers, diversified financiers, gold financiers and vehicle
NBFCs financiers under our coverage (given a higher share of fixed-rate loans). We expect NBFCs (across financiers) under
our coverage to deliver NII growth of ~22% CAGR over FY25-27E.

✓ Despite a brake on delinquencies, microfinanciers/credit card issuers will continue to see elevated slippages in
Q4FY25/Q1FY26. Thus, credit costs will continue to remain elevated for microfinanciers for the coming couple of quarters.
For other financiers, we could expect better recoveries going into Q4FY25, supporting asset quality improvement.
Expecting recovery in both microfinance and credit cards from early FY26, we expect gradual normalisation in credit costs,
thereby supporting earnings. Near-term pressures on earnings will persist. Navigating the headwinds effectively, we
expect NBFCs under our coverage to deliver an earnings growth of ~25% CAGR over FY25-27E.

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 Medium Term Outlook

(a) Continued demand visibility in the

(a) Deceleration in deposit growth Retail/MSME segment, with gradual
could weigh on Credit growth pick-up in corporate lending

(b) Continued concerns around (b) Steady Asset Quality Metrics with
pressure on collections and no major signs of stress visible in
rising in the unsecured secured retail and corporate
segments could keep credit segments, thereby keeping credit
costs elevated for Bank/NBFCs costs under control

(c) CRR cut and boost to liquidity by

RBI key positives

(d) Deferment of implementation of

LCR and ECL norms positive

Key Monitorables
(1) Deposit Growth – a key decisive factor to ensure credit growth sustenance
(2) Asset Quality headwinds in the unsecured lending space
(3) NIM movement for banks with the rate cycle reversing
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 Top Conviction Ideas: Tier I Banks

Stock Reco. TP Recommendation Rationale

✓ Consistent Outperformer: The bank reported yet another strong quarter, demonstrating strong
credit growth, healthy margins, and robust asset quality, thereby keeping credit costs largely
steady. ICICI Bank remains our most preferred pick amongst the banks.
✓ 2%+ RoA delivery: We expect the bank to continue delivering a strong performance over the
medium term enabling a consistent RoA/RoE delivery of 2.2-2.3%/17-18% supported by (1)
strong business growth while maintaining a steady C-D Ratio, (2) focus on strengthening fee
income, (3) range-bound Opex ratios with no aggressive investments in sight, (4) pristine asset
quality metrics and (5) adequate capitalisation. We factor in strong business growth and expect
the pace of earnings growth to remain healthy. We factor in Advances/NII/Earnings growth of
ICICI Bank Ltd. BUY Rs 1,500*
16/11/12% CAGR over FY25-27E.
✓ Asset quality remains pristine: Gauging the headwinds in the unsecured lending space, ICICIB
gradually decelerated its pace of growth in the unsecured segment (~14% portfolio mix). In line
with industry performance, the bank has also seen an inch-up in delinquencies in the Credit Card
and Personal Loan portfolio. However, trends are expected to stabilise in the coming quarters.
The credit costs in the retail and corporate portfolios continue to remain stable. Business banking
credit costs are lower than credit costs in the retail portfolio. The bank does not expect any major
asset quality challenges, with performance remaining stable across segments and expects credit
costs to be capped at ~50bps on a steady state basis.
* Note: Target Price is based on our Q3FY25 Result Update Report
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 Top Conviction Ideas: Tier I Banks

Stock Reco. TP Recommendation Rationale

✓ Progressing well on LDR improvement; Growth momentum to resume from FY26: In line
with HDFCB’s stance of improving LDR aggressively to pre-merger levels of mid-80%, the bank
has been progressing well with deposit growth outpacing credit growth. We expect the bank’s
efforts to materialise with LDR dropping to ~87% by FY27E. HDFCB continues to calibrate
growth, considering concerns about both credit quality and pricing (mainly in corporate lending).
The bank is re-orienting itself amidst a challenging environment, preparing to resume its growth
journey, and gaining market share as macros change.
✓ Best-in-class Asset Quality: HDFCB has maintained pristine asset quality across cycles, which
can be credited to its strong underwriting practices and risk-calibrated lending. The management
HDFC Bank Ltd. BUY Rs 2,000*
also emphasised that asset quality metrics across segments remain best-in-class, and the bank is
confident that these trends are sustaining.
✓ RoA to improve: HDFCB remains an outlier among banks because of its strong asset quality
performance, given the rising stress, especially in the unsecured segment. Thus, supported (i)
Adequate levers to improve NIMs, (ii) Controlled Opex growth and improving productivity ensuring
cost ratio moderation, and (iii) Pristine asset quality ensuring controlled credit costs should enable
HDFCB to deliver an improving trend on return ratios. RoA/RoE is expected to range between
1.8-1.9%/14-15% over FY25-27E. Faster improvements in LDR and NIM expansion remain
key re-rating levers for the bank.

* Note: Target Price is based on our Q3FY25 Result Update Report

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 Top Conviction Ideas: Tier I Banks

Stock Reco. TP Recommendation Rationale

✓ Growth visibility is healthy; momentum remains buoyant: SBI has reaffirmed its credit growth
guidance of 14-16% in FY25, supported by healthy demand visibility in the retail portfolio and a
strong corporate pipeline. The corporate loan pipeline currently stands at Rs 4.8 Tn (largely capex
driven), of which Rs 2.2 Lk Cr have been sanctioned. The bank also expects growth in the Xpress
Credit portfolio to pick up gradually (expecting double-digit growth), supported by the budgetary
boost to consumption. We expect SBI to deliver a healthy advances growth of 13% CAGR over
FY25-27E.
✓ Asset Quality trends to remain healthy: In Q3FY25, the SMA2 book inched-up sharply QoQ.
However, it includes a long-term government sector customer of the Bank, with fund-based
State Bank of India BUY Rs 1,025* outstanding of Rs 58 Bn. The account has been pulled back subsequently. Going ahead, the
management does not expect any major negative surprises on asset quality across segments.
Thus, as credit costs continue to normalise with the book ageing, SBI remains confident of capping
credit costs at 50bps across cycles.
✓ Cruising along to deliver RoA of 1%+: SBI remains well-poised to sustain its growth momentum
supported by its comfortable LDR, providing it levers to accelerate credit growth (especially in retail
and SME), offering scope to support NIMs. We believe SBI could continue to deliver a sustainable
RoA of 1% over the medium term backed by (1) Healthy growth visibility across segments, (2)
Strengthening deposit franchise with focus on CASA deposits, (3) Ramping-up the fee income
profile, (4) Controlled Opex and Provisions.
* Note: Target Price is based on our Q3FY25 Result Update Report
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 Top Conviction Ideas: Tier I Banks

Stock Reco. TP Recommendation Rationale

✓ Growth momentum resumes, visibility healthy: CUB will continue to focus on its core segments
– MSME and Gold loans to drive growth hereon. Growth visibility has improved with the
implementation of new digital initiatives. The bank does not intend to pursue growth in the
unsecured segments. CUB has launched retail products - LAP, Home Loans and Affordable
Housing - which are currently in the pilot stage and have been received well. Their contribution to
the portfolio is expected to improve further to 8-9% over the next 3-4 years. We pencil in ~14%
CAGR growth over FY25-27E, expecting the retail franchise to contribute healthily to incremental
growth.
✓ Asset Quality on an improving trend: The management expects the slippages to trend
City Union Bank BUY Rs 215*
downwards as it expects to cap its FY25 slippages at Rs 800 Cr and further improve going into
FY26, with slippages maintained at Rs 700 Cr. Meanwhile, recoveries from live NPA and written-off
accounts are expected to remain healthy and over and above the slippages for the next couple of
quarters, thereby aiding asset quality improvement. CUB’s negligible presence in the unsecured
segment has insulated it from asset quality challenges visible across other players.
✓ NIMs remain steady at 3.6% (+/-10bps): The management remains confident of maintaining
margins at 3.6% (+/-10bps) even in a rate cut cycle. The bank has successfully transitioned the
gold loan book from a floating rate (primarily EBLR-linked) to a fixed rate, which should bode well
from a margin perspective.
* Note: Target Price is based on our Q3FY25 Result Update Report
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 Top Conviction Ideas: NBFCs and Diversified Financials
Stock Reco. TP Recommendation Rationale
✓ Credit costs to moderate gradually: BAF is continuing to take proactive risk actions by cutting
segments and pruning exposures in stressed segments. The company has also brought down the
share of customers having 3+ live unsecured loans significantly, and as it exits FY25, the share will
be at par with pre-COVID levels. BAF has seen an improvement in collection efficiency (CE) across
most segments in Dec’24-Jan’25 vs Oct-Nov’24 and expects the trend to continue. Thus, the
management expects credit costs to settle at 2-2.05% in Q4FY25 and the downward trajectory to
<2% to continue in FY26, provided Q4FY25 credit costs are within the guided range. BAF’s
management remains confident of maintaining GNPA/NNPA in a steady range of 1.2-1.4%/0.4-0.5%
on a steady state basis. BAF will continue to prioritise asset quality over growth.
✓ Growth momentum to remain healthy; Airtel partnership to contribute to growth: BAF’s AUM
growth was broad-based, except for slower growth in the auto finance portfolio. Going forward, the
Bajaj Finance Ltd. BUY Rs 9,050* AUM mix is expected to remain largely unchanged. The management has guided for ~25% AUM
growth to continue over FY26. Additionally, the recently announced partnership between BAF and
Bharti Airtel (Airtel) offers the company the opportunity to tap into Airtel’s customer base. Currently, 9
of BAF’s products will go live by Mar’25, and the company will look to expand its product offerings
through FY26. The company has identified a customer base of 200 Mn Airtel customers that does not
overlap with BAF. We expect BAF to deliver a healthy ~26% CAGR growth over FY25-27E.
✓ NIMs to remain stable: The management has indicated that CoF is expected to remain stable
hereon. Going into FY26, the management expects a 4-5bps respite on CoF, with or without a rate
cut. On the asset side, the management remains confident in protecting yields despite pricing
pressure being visible in certain segments. However, the company will continue to balance margins
and growth while prioritising margins. We expect margins to remain steady, ranging between 9.7%
and 9.8% over FY25-27E.

* Note: Target Price is based on our Q3FY25 Result Update Report

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 Top Conviction Ideas: NBFCs

Stock Reco. TP Recommendation Rationale

✓ Asset Quality improvement from Q4FY25 onwards: The management expects asset quality to
improve going into Q4FY25 and beyond. A majority of the stress in the CSEL portfolio is from the
portfolio sourced through its partners, which the company is gradually phasing out over the next year,
which should help in reducing NPAs in this segment. Additionally, the credit costs in the Home Loan
(HL) and LAP book are gradually normalising as the book continues to season. CIFC’s focus remains
on improving collection, with the company adding 55% of the incremental hiring towards
strengthening collections. Currently, the strength of the collections team is ~31K employees. The
management expects credit costs to trend downwards from Q4FY25, with FY25 credit costs at
~1.4%.

✓ VF portfolio asset quality to witness improvement: The stress build-up in the SCV and LCV
Cholamandalam portfolio has been owing to slowing consumption and rural demand impacting the capacity utilisation
Investment & Finance BUY Rs 1,650* of vehicles. However, on the brighter side, the management has indicated that the capacity utilisation
Company Ltd. of SCV/LCVs has improved meaningfully to 70-80% in Q3FY25 vs a bottom of ~50% over Q1-
Q2FY25. Within the VF portfolio, the asset quality of 2-wheelers used CVs and used cars continues
to hold up well. In the HCV portfolio, the recovery is slower. However, given CIFC’s lower exposure,
the impact is expected to be limited. Thus, VF portfolio credit costs are expected to gradually trend
downwards over FY26.

✓ Confident of delivering 25% growth: The management has re-iterated its guidance of delivering
AUM growth of 25% over the medium term. CIFC will aim to maintain a disbursement growth of 15%
in HL over the medium term, which should translate into an AUM growth of 25-30%. Similarly, in the
LAP portfolio, the company is eyeing to clock a healthy disbursement growth of 25% over the
medium term, driving strong AUM growth of 35-40%. We expect CIFC to deliver a broad-based AUM
growth of ~26% CAGR over FY25-27E, with growth driven by HL and LAP segments.

* Note: Target Price is based on our Q3FY25 Result Update Report

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 Top Conviction Ideas: NBFCs

Stock Reco. TP Recommendation Rationale

✓ Optimism around growth momentum sustaining: The management highlighted that rural demand
remains robust and is expected to drive healthy AUM growth for SFL. Growth in the CV segment has
been slower, primarily led by an increase in ATS (prices up ~30% over the past three years) rather
than volume growth. Volume growth in the CV segment has been constrained due to limited capacity
additions, with existing capacity witnessing improved utilisation rates. In PV financing, growth has
been driven by both value and volume. SFL’s market share in PV financing remains low, and the
management foresees a significant growth runway ahead. Limited investment in public transport,
except in select metro and Tier I cities, coupled with the graduation of 2W customers to used PVs, is
expected to sustain buoyant growth in the segment. In the 2W segment, SFL aims to maintain 2x
industry growth.

✓ No concerning trends on asset quality visible: SFL’s asset quality deteriorated marginally in
Shriram Finance Ltd. BUY Rs 705* contrast to general H2 trends, wherein asset quality witnesses gradual improvement. However, the
management sounded confident in maintaining stable asset quality, with no structural challenges
visible. SFL expects asset quality improvement driven by healthy rural cashflows, with improvement
visible in Q4FY25. Credit costs are expected to remain under control at <2%.

✓ NIMs to rebound: During Q3FY25, NIMs contracted by ~26bps, mainly due to excess liquidity due to
a large ECB transaction. This had an impact of ~20bps on margins. The management has stated that
the excess liquidity will be moderated over the next couple of quarters and will return to the
company’s earlier policy of maintaining 3 months liquidity buffer. Thus, margins are expected to
improve going into Q4FY25. The incremental CoF stabilised and improved by 2bps during the
quarter. This is expected to support NIMs going ahead. The rate cut would benefit the company’s
margins. We expect NIMs to remain steady at 8.7% (+/-5bps) over FY25-27E.

* Note: Target Price is based on our Q3FY25 Result Update Report

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Private & Confidential | 16

 Digitally signed by NEERAJ
Disclaimer NEERAJ CHADAWAR CHADAWAR
Date: 2025.02.19 15:14:36 +05'30'

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