Motilal Oswal, a prominent brokerage firm, has unveiled its latest insights into the Banking, Financial Services, and Insurance (BFSI) sector, spotlighting its top stock recommendations in both the large-cap and midcap categories. The firm expresses optimism regarding the ongoing transformation of India’s financial framework, spurred by factors such as the rise of digital banking, the growth of fintech, regulatory advancements, and a rapidly expanding population.

BFSI Sector Growth: A Remarkable Journey

According to Motilal Oswal’s analysis, the market capitalization of the BFSI sector has experienced an astonishing increase, surging more than 50 times over the last two decades—from ₹1.8 trillion in 2005 to an anticipated ₹91 trillion by 2025. This monumental shift has intensified the necessity for in-depth, stock-level research, leading the brokerage to expand its coverage of the sector from 30 stocks in FY20 to nearly 70 today.

Top Stock Picks: Large Caps and Midcaps

When it comes to large-cap stocks, Motilal Oswal recommends several key players: ICICI Bank, HDFC Bank, and State Bank of India. For mid-sized banks, the favorites include Federal Bank and AU Small Finance Bank. In the Non-Banking Financial Companies (NBFC) segment, preferred choices are Shriram Finance, HomeFirst Finance, PNB Housing Finance, and L&T Finance Holdings.

Private Sector Banks: Leading the Charge

The brokerage highlights that private banks are outperforming public sector banks (PSBs) in terms of growth. The report projects that earnings for private banks (PVBs) will rise approximately 11.7% in FY26 and 18.8% in FY27, while PSBs are expected to see more modest growth rates of 7.1% and 11.7% respectively during the same period. This trend underscores the resilience of private banks, which boast stronger balance sheets and superior cost management strategies.

Evolving Landscape of the BFSI Sector

The influence of the BFSI sector within the Nifty 50 index has grown significantly, escalating from 14.6% in FY04 to 37.9% by April 2025. Notably, HDFC Bank’s share has risen from 1.7% to 13.3%, while ICICI Bank has increased its stake from 4.6% in FY18 to 9.1% today. In contrast, the share of PSU banks has diminished to 2.8%, with only SBI remaining in the benchmark index. Additionally, the share of NBFCs has plummeted from 10.3% in FY20 to 4.8%, primarily due to the merger of HDFC Ltd with HDFC Bank.

Continued Interest from Foreign Institutional Investors (FIIs)

Motilal Oswal’s report also emphasizes the sustained fascination of foreign institutional investors with India’s BFSI sector. Over the past 15 years, FII investments have skyrocketed 11-fold, rising from ₹2 trillion in 2010 to ₹23.7 trillion by December 2024. Prominent private banks like HDFC Bank and ICICI Bank have consistently attracted FII interest, thanks to their robust growth, stable asset quality throughout economic cycles, and technological prowess.

However, recent global challenges, including elevated interest rates and tighter liquidity, have led to a temporary decline in FII interest, particularly affecting mid- and small-cap stocks.

In summary, as the BFSI sector continues to evolve, backed by strong market fundamentals and the increasing interest of institutional investors, the landscape is ripe for investment opportunities, particularly in the private banking segment.