Large private banks remain top pick despite June quarter margin pressure: BNP Paribas

BNP Paribas remains positive on large private sector banks despite the recent margin disappointment, saying investors should look beyond one quarter's earnings.

Santanu Chakrabarti, India Analyst-BFSI at BNP Paribas, believes earnings are beginning to recover while valuations remain attractive, creating a compelling long-term investment opportunity.

He said the market reaction was largely driven by weaker-than-expected net interest margins (NIMs), particularly at HDFC Bank, but stressed that the setback is a short-term issue rather than a structural concern.

"Today we may be talking down 8-9% EPS growth in some of these private banks in the very first quarter, but six months back, the consensus was these numbers are going to be flat to a decline... the expectations have changed, the valuations have not changed that much. I think the catalyst is there, the valuation support is there," Chakrabarti said.

HDFC Bank remains one of BNP Paribas' top picks. Chakrabarti said investors should focus on the factors driving margins—deposit growth and low-cost CASA deposits—rather than one quarter's NIM performance.

"Margin is an outcome; those are the drivers," he said, adding that HDFC Bank continues to execute well on deposit mobilisation despite temporary pressure from higher short-term funding costs.



He also expects the RBI's Foreign Currency Non-Resident (FCNR) deposit scheme to support funding across both private and public sector banks, although some of the benefit has been offset by higher short-term money market rates.

On public sector undertaking (PSU) banks, Chakrabarti acknowledged their strong loan growth but cautioned that the key concern is not deposit growth alone, but the mix of deposits.

"It's not so much deposit growth that I'm worried about in the PSU banks. It is the composition of those deposits. I'm saying that the CASA game is critical to you remaining competitive in prime assets, and that's where they seem to be losing share," he said. He also warned that unusually low credit costs at PSU banks are unlikely to remain at current levels indefinitely.

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Beyond banks, BNP Paribas remains positive on life insurers and Bajaj Finance among non-banking financial companies (NBFCs), but continues to see the best value in large private banks as improving earnings are yet to be fully reflected in their valuations.



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