Banks vs NBFCs: Where to Invest After RBI Rate Hike?

Investing Strategies in the Wake of RBI’s Rate Hike: Banks vs NBFCs

Analysts weigh in on the implications of the RBI’s latest rate hike for investors navigating the banking and NBFC sectors.

Positive Outlook for Larger Banks

The RBI’s decision is seen as a potential boon for larger private banks, public sector banks (PSBs), and housing finance companies (HFCs). According to a note from Jefferies, banks that have a higher share of External Benchmark Lending Rate (EBLR) loans and a reasonable loan-to-deposit ratio (LDR) are likely to experience positive earnings over the next three to six months. This is particularly true for banks like ICICI Bank and Kotak Mahindra Bank, which have a significant proportion of EBLR loans and manageable LDRs.

In contrast, HDFC Bank and Axis Bank are expected to be mid-range beneficiaries. While they also have a substantial share of EBLR loans, their higher LDRs and reliance on wholesale deposits may temper the positive impact of the rate hike. This nuanced outlook underscores the importance of understanding individual bank profiles when considering investments in this sector.

Risks for Smaller Banks and NBFCs

Smaller private banks and NBFCs are facing heightened risks due to their greater exposure to fixed-rate or internally benchmarked loans. This could lead to a squeeze on their margins as the cost of funds rises. Analysts suggest that while larger banks are well-positioned to benefit from the rate hike, smaller players may struggle to maintain profitability under the new interest rate regime.

For instance, while prime HFCs like LIC Housing Finance and Bajaj Housing Finance may benefit from the rate hike due to their higher floating assets compared to liabilities, companies such as Mahindra & Mahindra Financial Services and SBI Cards could face challenges. This divergence highlights the critical need for investors to assess the risk profiles of individual institutions within the broader banking and NBFC landscape.

Top Picks for Investors

Following the RBI’s Monetary Policy Committee (MPC) meeting, Jefferies has identified ICICI Bank, State Bank of India (SBI), and Axis Bank as top picks among large-cap banks. These institutions are expected to leverage their strong CASA (Current Account Savings Account) franchises to expand net interest margins (NIMs) in the current rate environment.

Rajesh Agarwal, head of research at AUM Capital Market, emphasizes that in a rising rate environment, repo-linked loans tend to reprice quickly, while deposit costs adjust more slowly. This dynamic generally favors banks with robust CASA deposits, allowing them to enhance their margins. Gaurav Sharma from Globe Capital echoes this sentiment, recommending large private banks and high-quality NBFCs with strong deposit franchises as preferred investment choices.

Key Highlights

• RBI raises repo rate by 25 bps, shifting to ‘Calibrated Tightening’.
• Larger banks like ICICI Bank and Kotak Mahindra Bank expected to benefit the most.
• Smaller banks and NBFCs face risks due to fixed-rate loan exposure.
• Top investment picks include ICICI Bank, SBI, and Axis Bank.
• Investors advised to assess individual bank profiles for better risk management.

Investor Note: As the RBI’s rate hike reshapes the financial landscape, investors should focus on banks with strong CASA deposits and manageable LDRs, while remaining cautious of smaller banks and NBFCs that may struggle to adapt to the changing interest rate environment.