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The BFSI sector is at an inflection point where near-term headwinds are paving the way for meaningful medium-term gains. Our latest Top Conviction Ideas – BFSI identifies select opportunities in Banks, NBFCs, and Diversified Financials that stand out for their growth visibility, asset quality resilience, and management strength. With the sector poised for a revival from H2FY26, we believe this is the time to position portfolios strategically for compounding returns.

Banks – Review, Outlook & Key Monitorables

Q1FY26 was a mixed quarter for banks, with larger private and PSU banks managing NIMs better than expected, while mid-sized players and SFBs saw sharper compression. Credit growth at ~11% YoY was in line with systemic trends, supported by retail and SME lending, but corporate credit remained sluggish due to competitive pricing pressure. Margins faced expected pressure from the recent rate cuts, though operational efficiencies and treasury gains helped PPOP beat estimates. Asset quality saw seasonal agri slippages and continued stress in the unsecured segment, alongside stress emerging in SME, and CV segments. However, the stress in unsecured portfolios has likely peaked. Looking ahead, growth momentum is expected to pick up from H2FY26, supported by rate cuts, festive demand, and a consumption boost from tax reductions. Our coverage universe banks are expected to deliver 14% CAGR credit growth over FY25-28E, with NIM recovery visible from Q3 onwards as deposit repricing benefits flow in. Fee income growth will mirror business growth, and cost discipline should keep PPOP CAGR healthy at ~14%. Asset quality trends in unsecured products and stabilisation in SME/CV portfolios remain critical to monitor

With valuations still attractive in select names, we prefer banks with robust deposit franchises, stable asset quality, and strong execution track records, which are well placed to capitalise on the upcoming credit growth cycle.

NBFCs – Review, Outlook & Key Monitorables

NBFCs had a softer Q1FY26 due to seasonal weakness and slower economic activity, but AUM growth across our coverage still held healthy at 19% YoY. Disbursements in gold loans, used CVs, and used cars showed strong momentum, while MFIs continued to stabilise from past stress. Except credit cards and certain microfinance lenders, margins compressed across most segments driven by rate pass-throughs, competitive yield adjustments, and higher reversals. Asset quality issues persisted in microfinance (especially in KA and TN) and emerged in smaller ticket-size SME portfolios, but management commentary points towards normalisation from H2FY26.

We expect NBFCs under coverage to deliver ~21% CAGR AUM growth over FY25-28E, with a sharper pickup in unsecured segments and benefits from consumption demand pick-up. Vehicle financiers should benefit from improving rural incomes and infrastructure spending, while housing and diversified financiers should see steady growth aided by sectoral tailwinds. Microfinance players, despite near-term pain, are positioned for a rebound as credit costs normalise. Key monitorables include asset quality in SME and MFI segments, NIM recovery trajectories, and the pace of unsecured lending growth.

Diversified Financials – Review, Outlook & Key Monitorables

Performance across diversified financials was mixed in Q1FY26. SBI Cards saw elevated credit costs due to an ECL model reset, though NIMs held steady, and cost control measures were visible. SBILIFE delivered steady growth in high-margin products, aided by a shift towards non-PAR and protection segments, maintaining healthy VNB margins. NAM posted strong AUM growth with market share gains, supported by a resilient SIP franchise and improving product diversification.

Our outlook remains constructive for all three sub-segments. For SBI Cards, NIM expansion from CoF repricing and improved opex ratios should offset credit cost pressures, with RoA/RoE expected to improve meaningfully from FY27E. SBILIFE is well-positioned for double-digit growth in NBP, APE, and VNB, supported by agency channel activation and product mix optimisation. NAM remains a direct beneficiary of the financialisation of savings in India, with strong growth potential in passive offerings and SIP-led flows. Key monitorables include asset quality stabilisation in SBI Cards, sustained APE growth in SBILIFE, and continued market share gains for NAM.

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