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Informist, Monday, Jul. 6, 2026

MUMBAI – Brokerage Emkay Global Financial Services has taken an 'underweight' stance on the financial sector and cut expsure to zero for large-cap and public banks. Emkay Global now prefers small and mid-cap banks and non-banking financial companies as it expects a strong cyclical earnings recovery for lenders in 2026-27 (Apr-Mar). Capital market companies is the brokerage's other preferred sector.

It has reduced exposure to the financial sector to 25% from 29% due to high stock valuations after a recent rise in prices. "Structurally, rising competition has ended hyper-growth for large private banks, and they are unlikely to gain meaningful market share from here," it said.

Despite the multi-year de-rating, Emkay Global believes the valuations of large-cap banks are still above the fair-value zone. It remains cautious on these stocks as the market continues to "extrapolate past some of the hyper-growth despite the structural downward shift in growth." 

The brokerage exited HDFC Bank and replaced Shriram Finance with Mahindra & Mahindra Financial Services. It also replaced ICICI Prudential Asset Management Co with Aditya Birla Sun Life AMC. 

Small and mid-cap banks offer the clearest recovery due to improving current account and savings account and a turnaround in asset quality, the brokerage said. Emkay Global is 'neutral' on NBFCs while it expects capital market entities to benefit from the structural shift in household savings towards equities.

The brokerage expects FY27 to be a "recovery" year for the sector. It sees earnings per share growth rising to around 15% for the sector following two years of single-digit earnings growth. Credit growth is seen at 15% after a strong FY26 which was led by vehicle and unsecured loans, and mortgages.

Larger banks are struggling to gain market share amid rising competition. The disruption in payments, distribution, and unsecured lending is also hurting the long-term profitability of these banks, with additional pressure from corporates turning to bond markets for funds, the brokerage said. 

"FDI (foreign direct investment) and strategic capital are key positives for SMID (small and mid cap) banks – recent investments (eg Warburg/ADIA into IDFC First) provide long-term growth capital, ease dilution overhangs, and signal confidence in franchise-building runway," Emkay Global said.  End

Reported by Ashutosh Pati

Edited by Avishek Dutta

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