Motilal Oswal’s Nitin Aggarwal expects high-teen earnings growth for HDFC Bank and ICICI Bank

Nitin Aggarwal, Senior Group VP, Head- BFSI, Institutional Equities, Motilal Oswal Financial Services remains optimistic on both ICICI Bank and HDFC Bank, expecting them to deliver high-teen earnings growth over the next year.

Both banks reported healthy margins and solid loan growth momentum, which Motilal Oswal Financial Services believes will continue to support earnings in the coming quarters.

Despite muted stock reactions post-results, Aggarwal noted that the long-term fundamentals remain firmly in place.

Aggarwal added that the September quarter likely marks the bottom for sectoral earnings growth, with profitability expected to strengthen from here. Margin resilience across banks, he said, has been better than expected, while the outlook for FY27 points toward a double-digit recovery in earnings.

This is the edited excerpt of the interview.

Q: Let us start with the big blue chip boys, HDFC Bank and ICICI Bank. I don't think there was any complaint in the numbers, but how much of it is already captured in the price, and what is your stance on these two?

A: Both the large banks reported fantastic numbers. If you look at ICICI reported an adjusted expansion in margins, and HDFC Bank also reported a slightly lower dip versus what we were expecting. Given how the loan growth is likely to look up in the coming quarters, and already, we have seen a good traction in the second quarter we remain optimistic on the earnings outlook for both the banks.

Though, after such a good results, we have not seen as much of a move. Rather, the performance was relatively modest on the trading day. However, this is a very short term to look at it. We remain positive on both the names and we think they should ideally deliver somewhere in the high-teens over the coming year.

Q: What has been the aggregate earnings picture from the banking stocks this time? Have you done the analysis, and how would it compare with the expectations that you had at the start of the quarter?

A: This quarter is likely to be the bottom in terms of the earning growth. We already had flat numbers in terms of the year-on-year growth in first quarter and this quarter, we expected this growth to decline to negative 7%.

Given how the numbers have trended so far, we believe there is a fair chance that this deceleration will moderate, and while we may still be in the negative, but it will be lower than 7% what we projected. The outlook on earnings is certainly looking stronger with the kind of resilience that you have seen in margins across the board. So several banks have reported margin expansion, and the decline for almost everybody so far is lower than what we have estimated going into the quarter.

Q: Besides earnings, the other big talking point is about these big deals. Suddenly, the interest for Indian banking names has gone up tremendously. The smaller banking names we saw, Yes Bank, there was deal out there. Off late we have that RBL banking deal did get announced. People putting in $3 billion plus into the bank, telling you the kind of interest out there, how much of the good news is paid out for RBL Bank, what is the rating you all have?

A: We have increased our target on RBL Bank. We upgraded the stock three quarters back and looking at the outlook as to post the deal and the new opportunities that will unfold, we may have maintained a positive stance and raised the target to ₹360 on the stock. We believe as to the execution and the opportunities that will unfold, and how well the bank is able to capitalise on those opportunities, will all be critical.

Looking at just the size of the deal, the association with the GCC and the involved countries, and the kind of opportunity, because you will benefit on both the asset side, the fee income, the liability traction, the NRI deposits, export financing so- so many opportunities are there, and it will all depend on as to how the things unfold from here.

The progressive step that the RBI has taken has certainly brought in a lot of interest and attention to these mid-sized banks, which have been trading so much cheaper when you compare to the large banks.

Q: So among all the banks that you cover, and the ones that you have a buy call on, which ones have the maximum upside in terms of the in terms of your target price? I am just trying to understand from an investor's perspective, where do you see maximum risk reward from here and also throw in a word on IndusInd Bank, it's still dealing with its issues, still a cleanup going on, right off so high this quarter. For those who are willing to take higher risk, could this be an interesting bet as

A: The targets will keep on getting revised up as to how the earnings outlook unfolds. As of now, it looks like FY27 will be still a much better year. While FY26 we have started seeing a recovery, but FY27 is when we are looking at a double-digit earnings growth for the sector. This year at the preview time, we forecasted flattish for the year, this may be like a mid-single digit kind number in terms of earnings growth for the year.

Next year certainly will still be in the double-digit if all goes well, if there is not much of rate cut impact, then this earning growth can move towards mid-teens also, that's very likely. Which is where you will continue to see the targets getting revised up. We will roll over the targets to FY28 and which is where the more and more upsides will open up.

From the preference point of view, we have been positive on HDFC and ICICI among the large private banks and AU Small Finance and Federal Bank are some of the mid-sized names that we have marketed in the recent quarters

On IndusInd Bank, we are still watching out as to how the execution will go. The management is still working out on the three year strategy, which is what they talked about on the results call, and therefore how the ROA can quickly come back to 1% mark, which is one key milestone to look forward to. As of now, we are still maintaining a neutral on the stock, but certainly the downside on this name, just from the recovery standpoint and the valuation standpoint, looks limited as of now.

Q: What is the call that you are taking on gold financiers, Manappuram Finance and Muthoot Finance both up 50% since the start of the year, and they have been big beneficiaries of the rise in gold prices. So from here on, at this juncture, what is the view on these stocks?

A: We do track both the names and it's a very tricky bet at this price especially, and our official rating is neutral, but given the surge in the gold price, these stocks continue to, of course, do better than what we are looking at in terms of our growth and profitability projections. Given the continued uptick that we are seeing on the gold price, which is completely relentless and very, very sharp in terms of upswing, both these stocks will continue to do better.

Muthoot Finance certainly has been doing much better in terms of growth and profitability, and which is where our bias is more towards Muthoot at this price.

Q: But Muthoot is trading at more than three times right now. You still would stick to Muthoot rather than you're the other two players that you potentially look at when you look at gold companies is a Manappuram that sell it on 1.7 times, or even an IIFL Finance that has some part of gold exposure. So among the three, you will still stick to Muthoot itself?

A: While we are neutral on both the stocks in terms of our official rating, but given the uptick in gold prices, these stocks will continue to do well versus what we are kind of writing right now. Because this is very unpredictable, and the uptick is very, very sharp to really fathom, and which is where we are also evaluating. But the continued thrust will keep these both the stocks doing better, and Muthoot certainly has done better in the last one year, if you look at.Read about our editorial guidelines and ethics policy