JM Financial prefers banks and largecap stocks over NBFCs and midcaps

JM Financial’s Lead-BFSI Research Analyst, Ajit Kumar said the firm prefers banks over non-banking financial companies (NBFCs) and largecap stocks over midcaps. “We have a preference towards names where valuation is benign, and at the same time, there is no asset quality risk,” he said.

The research team is cautious on mid-cap banks and NBFCs with high valuations and exposure to stressed segments such as micro and SME loans. “Mostly in NBFCs and midcap banks, which have higher exposure to this stress segment, and where the valuation is completely high, those are the places we are negative,” Kumar added.

Among large banks, JM Financial favours ICICI Bank, HDFC Bank, and SBI. For midcaps, City Union Bank is preferred, while Bajaj Finance and AB Capital are top picks in NBFCs. Affordable housing names like Aadhar Housing Finance Ltd and Aavas Financiers are also recommended due to low valuation and limited risk.

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Kumar noted pressure on margins for some lenders following repo rate cuts and moderating loan growth. “There can be some bit of pressure on the margin side,” he said, highlighting that this could affect returns on equity.

Low credit growth remains a concern, with overall growth at around 10% year-on-year (YoY). Corporate loans account for roughly 25–30% of this, with little pickup in private capex over the last few years. Retail loans, including personal loans and credit cards, have also slowed to single-digit growth after years of faster expansion. JM Financial expects credit growth to inch up to 11–12% by the fiscal year 2025-26 (FY26).

Vehicle finance is another area of caution, especially for higher-valued names. “From a financing perspective, since it happens on all-inclusive pricing, disbursement growth is going to remain muted in 2025-26,” Kumar said. Companies like Cholamandalam Investment & Finance Company Limited, Shriram Finance, and Mahindra & Mahindra Financial Services Limited (MMFSL) are facing disbursement challenges, with Cholamandalam being the most exposed.

For the full interview, watch the accompanying video

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