Emkay Global sees small and mid-sized (SMID) private sector banks at an inflection point, positioned to capitalise on accelerating credit growth given their smaller balance sheets and higher risk appetite.
The brokerage expects the ongoing credit cycle and a wave of strategic investments to drive strong earnings through FY27, supporting its positive stance on Federal Bank, RBL Bank, IDFC First Bank, and Yes Bank. It has added IDFC First Bank to its model portfolio.
“YES and RBL would benefit from the foreign bank ownership. This would bring new business opportunities in corporate banking (especially SME) and some edge in retail deposits via greater access to salary accounts and NRI accounts,” Emkay said.
The brokerage said the banks have been hamstrung with regard to growth because of less access to capital and a lack of strong ownership. This will change as it expects a faster trajectory, with market share gains at the expense of larger banks and PSUs.
“We look at this universe as a cohort and, ideally, would play the banks as a basket. Each has its own strengths. For inclusion in the EMP, however, we pick IDFC First Bank because of its greater growth visibility and profitability momentum,” it said.
Credit growth momentum
Emkay anticipated system credit growth to accelerate from 11 per cent in FY26 to 13.3 per cent in FY27, supported by policy easing and stronger consumer demand. Retail lending will remain the key driver, with auto and unsecured segments expected to outperform. Wholesale credit is seen growing 7-8 per cent, with steady demand offset by risk aversion. The brokerage believes smaller banks are better placed to benefit from this upcycle, given their lower base and greater exposure to high-yield categories.
Profitability turnaround
SMID banks Emkay said. reported lower credit costs in Q2FY26, while slippages and NPAs have begun to ease. Emkay expects credit costs to decline by 4-22 bps in FY27E, leading to stronger returns on assets (ROAs). Margins are projected to stabilize as the impact of rate cuts is absorbed in FY26E. Given their cyclical nature, SMID banks are likely to see a larger improvement in profitability-110-130 bps ROA gains in FY27E versus 10-30 bps for larger peers.
Strategic capital inflows
Recent stake sales and investments, including deals such as Blackstone-Federal, Emirates NBD-RBL, SMBC-YES Bank, and Warburg Pincus-IDFC First, are expected to improve capital adequacy, strengthen deposit franchises, and enhance governance. Emkay sees these partnerships as transformational for scalability and competitiveness, helping mid-sized banks gain market share from larger private and public sector peers.
IDFC First Bank added to model portfolio
Emkay included IDFC First Bank in its model portfolio, citing its strong deposit base, robust retail product mix, technology strength, and attractive valuation of 1.34x Sep-27E P/BV. The brokerage expects a turnaround post the Warburg Pincus investment, calling it a “relative call” within the preferred cohort.
Cautious on SFBs, MFIs, PSUs
While small finance banks (SFBs) and microfinance institutions (MFIs) may benefit from near-term tailwinds, Emkay views the sector as overpenetrated and prone to cyclicality. Public sector banks are expected to face earnings pressure in FY27E from lower treasury income and higher wage costs despite strong loan growth in FY26E.
Model portfolio changes
The brokerage replaced Bikaji with Gravita (ahead of new capacity commissioning), Voltas with Kajaria Ceramics (margin improvement), and ICICI Bank with Bajaj Finance. Kfin Technologies was swapped for IDFC First Bank.