“Margins Will Rescue This Quarter”: PL Capital’s Take on Financial Services Q1FY26
- 9th July 2025
- 02:00:00 PM
- 4 min read
Mumbai | July 9 – India’s financial services sector is headed for a steady Q1FY26 as lower borrowing costs and improving net interest margins (NIMs) help offset slower disbursement growth across vehicle finance portfolios, according to PL Capital’s latest earnings preview.
While a slowdown in auto volumes is visible, diversified players such as Cholamandalam Investment & Finance (CIFC) and Shriram Finance are expected to manage the environment better than pure-play vehicle financiers, while Bajaj Finance continues to demonstrate operational resilience.
“Margins will rescue this quarter even as topline growth moderates. With a softer rate environment, NIM gains will support profitability, but rural asset quality needs close tracking,” said Shreya Khandelwal, Analyst, PL Capital.
Slower Growth in Auto Finance, Resilience Elsewhere
Freight movement and vehicle sales were subdued during the quarter due to geopolitical tensions across border states, impacting growth in commercial vehicle (CV) and passenger vehicle (PV) segments. However, demand for tractors, buses, and two-wheelers remained relatively stable, supported by lower interest rates.
Bajaj Finance reported 25% YoY AUM growth to ₹4.41 lakh crore, aligned with guidance, while booking 13.5 million new loans (+23% YoY) and adding 4.7 million new customers, taking its total customer base to 106.5 million.
“Pure-play auto financiers may feel the impact of volume slowdown, but diversification into home loans and LAP will aid growth,” PL Capital noted.
NIM Expansion Driven by Lower Cost of Funds
The RBI’s repo rate and CRR cuts have translated into lower cost of funds (CoF) for NBFCs, driving sequential margin improvement:
- Shriram Finance expects a 15–20 bps reduction in CoF during FY26.
- CIFC anticipates a 15 bps CoF reduction as ~20% of its borrowings are linked to the repo rate/T-bills.
- Bajaj Finance is factoring in a ~15 bps improvement in CoF.
“In a quarter where growth may appear muted, margin stability will be the story to watch for financial services players,” said Khandelwal.
Investments Keep Operating Costs Elevated
NBFCs continue to invest in digital infrastructure (Bajaj Finance) and branch expansions (CIFC, SHFL) to capture market share across new lending verticals, keeping operating expenses high. However, PL Capital sees these investments as critical for maintaining scalability and product expansion over the medium term.
Asset Quality Largely Stable
Credit costs are expected to remain steady, supported by lower delinquencies in vehicle finance and recoveries from SARFAESI/property auctions. Bajaj Finance and CIFC, which reported higher credit costs in FY25 (2.1% and 1.5% respectively), are likely to see improvements in Q1FY26.
However, Shriram Finance flagged stress in rural pockets in its earlier commentary, which requires close monitoring despite supportive monsoon trends that could improve cash flows in H2FY26.
Key Financial Metrics Q1FY26 E
| Metrics | Bajaj Finance | CIFC | Shriram Finance | Sundaram Finance |
| NII (₹ Cr) | 10,365 (+5.7% QoQ) | 3,260 (+6.7% QoQ) | 5,867 (+5.4% QoQ) | 684 (+2.3% QoQ) |
| PAT (₹ Cr) | 4,839 (+6.5% QoQ) | 1,301 (+2.7% QoQ) | 2,193 (+2.5% QoQ) | 430 (-21.3% QoQ) |
| NIM (%) | 9.7 | 7 | 8.9 | 5.4 |
| Credit Cost (%) | 2 | 1.4 | 2.1 | 0.6 |
These estimates underline the steady but cautious quarter expected for financial services players, with margin gains supporting profitability amid moderate topline growth.
PL Capital’s Stock Picks in Financial Services
- Bajaj Finance: HOLD, Target Price ₹900 – Strong AUM growth, lower credit costs, improving margins.
- Cholamandalam Investment & Finance: HOLD, Target Price ₹1,575 – Expected NIM improvement, growth from diversified segments, expansion focus.
- Shriram Finance: HOLD, Target Price ₹685 – Steady CV portfolio, NIM improvement, cautious on rural asset quality.
- Sundaram Finance:HOLD, Target Price ₹5,000 – Stable NIMs, subdued demand, monitoring asset quality.
“We retain HOLD ratings across our financial services coverage, focusing on margin support, asset quality trends, and cost discipline in a low-rate environment,” PL Capital added.
Outlook: Margins Steady the Ship, Rural Trends Key to Watch
As India’s financial services sector enters Q1FY26, lower rates are helping stabilise NIMs, while volume growth remains under check due to demand moderation in vehicle finance.
Diversified players like CIFC and Shriram Finance are positioned to manage the environment better, while Bajaj Finance continues to deliver operational strength across its large customer base.
“The next phase will depend on rural demand trends post-monsoon and how NBFCs manage costs amid expansion,” Khandelwal concluded.
For detailed company-wise commentary, segment analysis, and PL Capital’s updated models,
click here to view the full Financial Services Q1FY26 report.
PL Capital
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
