While sharing his outlook on Indian banks at the BofA Securities 2025 India Conference, he said that the firm has turned incrementally more positive on mid-sized private banks, which he believes will benefit more in a rate-cut environment. “Eventually, you will see the midcap banks, which are structured more like non-banking financial companies (NBFCs), benefiting in terms of net interest margins (NIMs),” he said, referring to net interest margins.
While a rate cut may hurt margins initially, BofA expects growth to offset that over time. “With all these efforts and better liquidity from the Reserve Bank of India (RBI), we need to see that translate into better macro growth, better credit growth,” Swaminathan added.
Also Read | RBI expected to cut rates again amid benign inflation and ample liquidity
On public sector undertaking banks (PSUs), BofA has maintained a positive stance for over two years. According to Swaminathan, PSU banks have made structural improvements in risk management and intend to protect their market share.
The recent rally in PSU bank stocks is being attributed to low investor positioning and a widening valuation gap with private banks.
He also explained that PSU banks are currently trading at about 0.8 times forward book and 6-7 times price-to-earnings, nearly half of private bank valuations. “We do think the majority of the government banks can deliver around a 1-1.1% return on assets (ROA) on a sustainable basis,” which, according to BofA, supports a re-rating of these stocks.
Regarding asset quality, BofA believes the worst is behind us. He said that improvements may be gradual in the June quarter but should pick up in the second half of the year.
Also Read | RBI rate cuts likely to pause at 5.5%, bond yields may hover near 6%: BofA
In response to recent concerns about governance in select mid-sized banks, Swaminathan urged investors not to generalise. “We should just look at this as one case and not extrapolate it to the broader sector,” he said, noting better regulatory oversight and governance across the system.
Finally, BofA is watching for signs of improvement in demand and credit growth. “Unfortunately, we are not seeing that many positive signs as of yet… but it is a matter of time,” Swaminathan said.
For the full interview, watch the accompanying video
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