Engineer also argued that investors are focusing too much on net interest margins (NIMs) while overlooking the bigger ICICI Bank. Most banks have seen margins compress because they have aggressively grown their corporate loan books, which typically generate lower spreads. However, these loans also come with lower operating costs and lower credit risk, helping overall profitability. “I think there’s just too much focus on NIMs… without looking at the overall picture,” he said, urging investors to look beyond margins and pay greater attention to net interest income (NII), operating expenses and credit costs.
The latest earnings season, he said, supports that view. Among Federal Bank lenders, Axis Bank outperformed CLSA’s estimates, while Bajaj Finance was the standout among mid-sized banks. He added that the market has been overly harsh on several other lenders, with share price reactions driven more by margin concerns than by their overall financial performance.
Another positive that investors are overlooking, according to Engineer, is improving operating leverage. He pointed out that the banking industry’s workforce has remained largely unchanged over the past two years, even as business has continued to expand. This has helped banks improve efficiency and reduce their cost-to-assets ratio, providing an additional boost to profitability.On stock picks, Engineer favours HDFC Bank and SBI, saying both are well positioned to benefit from improving loan growth, stronger core earnings and healthy asset quality. He also believes the recent correction in Axis Bank offers a buying opportunity, arguing that while margins may remain under pressure in the near term, stronger loan growth should continue to support earnings.
Watch the full conversation here
Looking beyond individual stocks, Engineer expects private sector banks to outperform public sector undertaking (PSU) banks over the next few years. While public sector lenders have delivered strong returns in recent years, he believes their ability to grow loans faster than private peers could diminish as surplus liquidity reduces and deposit growth becomes the main constraint. He sees SBI as an exception because of its stronger franchise and better quality than the average PSU bank.
Engineer is also constructive on the broader financial sector. He believes the clean-up in microfinance is largely complete, weaker borrowers have exited the system and margins should improve as the cycle turns. Among non-banking financial companies (NBFCs), Bajaj Finance remains his preferred investment.
Catch all the latest updates from the stock market here
(Edited by : Unnikrishnan)
