UBS upgrades Bajaj Finance shares, LT Finance as it sees NBFCs better placed than banks. Here’s why

International brokerage UBS upgraded Bajaj Finance and L&T Finance shares, pushing them up 3% on Wednesday. UBS sees potential for a re-rating for the unsecured lending cycle, which is reviving. The brokerage expects robust asset quality too.

UBS set a target price of Rs 1,110 for Bajaj Finance, which implies a 9% upside from the current market level. The upgraded target price of Rs 380 for L&T Finance suggests a 25% upside potential from the current levels. Bajaj Finance shares climbed 3% to Rs 1,025 while L&T Finance went up 3% to Rs 313.

UBS maintained a Neutral rating for Bajaj Finance, citing expectations of cyclical EPS upgrades due to yield-accretive growth and robust asset quality. Meanwhile, they upgraded L&T Finance to Buy, anticipating faster personal loan growth and an ROA improvement towards 3%. The brokerage concluded that Bajaj Finance's asset quality issues have been resolved, and the increased provision coverage ratio offers a buffer against macro headwinds.

The brokerage believes Bajaj Finance has overcome its asset quality concerns and a rising provision coverage ratio provides a cushion against economic downturns. This may lead to higher-yielding loan growth in the near term, thereby accelerating cyclical earnings. They also expect EPS growth of over 30% in FY27, although it may decelerate to the high teens in FY28.

UBS sees L&T Finance improving its return on assets (ROA) over the past few quarters due to the growth of higher-yielding segments such as personal loans and gold loans, as well as a shift in the loan mix towards these segments. Credit costs have been gradually decreasing due to a favorable asset quality cycle, along with reduced operating expenses. Consequently, UBS expects a 50-basis-point improvement in ROA over FY26-28.

India is expected to enter a robust unsecured credit growth cycle, according to UBS. This is driven by strong asset quality across banks and NBFCs, flat unsecured household leverage for the past three years, ample system liquidity, and a risk-on approach from lenders. Furthermore, stabilizing gold prices may moderate gold loan growth, which has been a substitute for personal loans in recent years.

This could benefit private banks and large NBFCs with strong personal loan franchises. The market appears to have underappreciated the expected recovery in personal loan growth, which could result in earnings upgrades and an increase in return on assets (ROA) for select lenders.