Global brokerage firm Macquarie on its note on the banking and financial sector said that it is bullish on private sector banks and bearish on public sector (PSU) banks. 

What Happened: The research firm said the private sector banks are a steady compounding story. It backs the private sector banks to report a healthy return on equity (ROE) of 16%-18% over the next 3 years. Macquarie believes that private sector banks are trading at attractive valuations. 

According to the firm, PSU banks, NBFCs, and Insurance face regulations and declining fundamentals. The firm added that the PSU banks will see falling ROEs caused by the normalisation of credit costs. The additional risk of expected credit loss impact is yet to be factored in the earnings, it added. 

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The brokerage also said the life insurance companies will face lower value of new business growth this cycle due to falling margins. 

The NBFCs will no longer have the advantage coming from rate cuts in the near term and the full impact of RBI regulations, the brokerage said. 

Brokerage's Picks: Macquaire put HDFC Bank, Axis Bank, IndusInd Bank, Shriram Finance, LIC Housing and SBI Life in its top picks. 

It also upgraded Kotak Mahindra Bank to "outperform" from "neutral" and increased the target price to ₹2025 from ₹1860. City Union Bank and Bandhan Bank also got "outperform" calls and their target price raised to ₹180 and ₹240 respectively. 

The brokerage also downgraded SBI to "underperform" and increased the target price to ₹665. 

Price Action: On Thursday morning, shares of HDFC Bank were trading at ₹1,667.70 up by 0.59%. Kotak Mahindra Bank’s stock was trading up 2.20% at ₹1,785.20. SBI was trading 0.15% down at ₹851.30.

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