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

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UBS upgraded Bajaj Finance and L&T Finance shares, citing strong asset quality and growth prospects in unsecured lending segments. The brokerage forecasts robust earnings growth driven by personal and gold loans, with improving return on assets and credit cost trends supporting the outlook.

Shares of Bajaj Finance and L&T Finance gained up to 3% on Wednesday after international brokerage UBS upgraded the two stocks to Neutral and Buy, respectively.UBS sees scope for a re-rating as the unsecured lending cycle revives. It also expects asset quality to remain robust.With a revised target price of Rs 1,110, UBS analysts forecast an upside potential of 9% in Bajaj Finance, while a hiked target price of Rs 380 implies an upside of about 25% from current market levels. In Wednesday’s session, Bajaj Finance rose 3% to Rs 1,025, while LT Finance was up 3% to Rs 313.“We upgrade our rating on Bajaj Finance from Sell to Neutral, as we expect cyclical EPS upgrades on yield-accretive growth and strong asset quality, though its valuation remains demanding,” UBS said in a note. “We also upgrade our rating on L&T Finance from Neutral to Buy, expecting faster personal loan growth and ROA improvement toward 3%,” it added.UBS on Bajaj Finance shares“We believe BAF has cleared its asset quality issues across unsecured products, while an increased provision coverage ratio acts as a cushion against macro headwinds,” UBS analysts said in a note.This could provide a cyclical push toward higher-yielding loan growth in the near term, driving cyclical earnings acceleration. The company's EPS downgrades have largely passed and foresee strong EPS growth of 30%+ in FY27, although it may slow to the high teens in FY28.UBS on LT FinanceUBS said LT Finance has been on a path of improving return on assets (ROA) over the past few quarters. It noted that growth in higher-yielding segments such as personal loans and gold loans has remained strong, while microfinance (MFI) growth is recovering after weakness driven by asset quality. This has resulted in a significant shift in the loan mix towards higher-yielding segments.The brokerage also said credit costs have been gradually declining, supported by a benign asset quality cycle, while operating expenses have provided additional support. Overall, UBS factors in around 25 basis points of improvement in opex to AUM, around 15 basis points in credit costs and the remainder from margins, resulting in its assumption of a 50-basis-point improvement in ROA over FY26-28.UBS on India financialsIndia entering into strong credit cycle - UBS expects India to enter a strong unsecured credit growth cycle, led by personal loans. The brokerage said this is supported by healthy asset quality across banks and NBFCs, flat unsecured household leverage over the past three years, ample system liquidity and a more risk-on approach among lenders.UBS added that stabilising gold prices could moderate gold loan growth, which has been a key substitute for personal loans in recent years. This could benefit private banks and large NBFCs with strong personal loan franchises.Rate hike largely priced in - The brokerage believes the market is underestimating the expected recovery in personal loan growth, which could lead to earnings upgrades and expansion in return on assets (ROA) for select lenders. It said concerns over higher interest rates appear overstated given the significant liquidity surplus in the system, which could keep funding conditions supportive. With most NBFCs trading below their one-year average valuations, the brokerage sees scope for a re-rating as personal loan growth recovers.The brokerage expects around Rs 12-13 trillion of FCNR inflows to create excess liquidity, as system credit demand of around Rs 45-50 trillion is unlikely to absorb the entire pool in the near term, with domestic savings flows remaining stable. It said this could support NBFC funding through bank lines and NCD markets, keeping funding conditions favourable. The brokerage factors in a 15-20 basis point rise in FY27 funding costs, leaving limited downside risk from rate hikes.Healthier credit cycle ahead - It said that following a three-year credit cycle, asset quality across these segments is now at its best levels in several quarters, although NBFCs continue to see some residual stress in low-ticket business loans.Also read:70% IPOs in September gave a listing bounty for investors. Can NSE beat its weak GMP?According to UBS, unsecured leverage in India increased from 6% of GDP in FY19 to 10% in FY24, but has remained stable since then. In contrast, gold loans grew from around 1% of GDP to around 5% by FY26, although growth is expected to moderate as gold prices flatten.Alongside the improvement in asset quality across unsecured lending segments, CRIF data for August 2026 showed personal loan growth accelerating to around 30% for NBFCs and 9% for banks, marking a two-year high.The brokerage maintained its Buy rating on Cholamandalam Investment, Shriram Finance and Poonawalla Fincorp. Among banks, it expects ICICI Bank, HDFC Bank and Axis Bank to benefit from a pick-up in personal loan growth.Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Ve