Macquarie recommends private banks; upgrades Kotak, City Union Bank, and 2 more; downgrades SBI and 3 others

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Bajaj Finance, Cholamandalam, and M&M Finance from 'Neutral' to 'Underperform' among NBFCs, citing expectations of lower growth, declining ROEs, and a delayed rate cut cycle.In the insurance sector, while remaining cautious, the brokerage has upgraded SBI Life from 'Neutral' to 'Outperform', believing IRDA regulations less impact it. It expects SBI Life to achieve sector-leading VNB (value of new business) growth of 15 percent and considers its valuations reasonable in this context.As per the brokerage, private sector banks are a steady power of compounding story.

Despite a lower loan growth environment, it expects private sector banks to report healthy returns on assets (ROAs) and ROEs over the next three years and remain steady power of compounding stories."We expect healthy ROEs in the 16-18 percent range. They are less affected by ECL regulations and carry contingent buffers (most of them) and we do not see any adverse asset quality outlook.

A delayed rate cut cycle further cushions NIMs for them in the near term. We make marginal changes to our earnings estimates for private sector banks after their full-year numbers, and raise TPs for most of them as we roll our valuation-based models forward to FY26E, from FY25E," it said.Meanwhile, for PSU Banks, Macquarie believes that the public sector lenders will see falling ROEs driven by normalisation of credit costs.