Union Budget 2025: Will tax reforms, capex surge lift banking stocks?

Market analysts see banks as a relatively safer haven with possibility of stable growth combined with relatively low valuations

During their Q3 management conference calls, banking companies highlighted ongoing challenges, including tight macroeconomic conditions, constrained liquidity, and sluggish credit growth. Against this backdrop, the sector is eagerly awaiting measures in the 2025 Union Budget to stimulate credit expansion and improve liquidity, fostering future growth.

Most banking stocks have slipped leading up to the 2025 Union Budget, weighed down by slow credit and deposit growth, higher slippages in the unsecured retail segment, and margin compression due to rising funding costs. Additionally, the absence of a key trigger – divestment of state-run banks – has kept sentiment around these stocks muted, as the asset quality-led re-rating has already happened.

Shares of HDFC Bank, ICICI Bank, Axis Bank, SBI, Bank of Baroda, PNB, Canara Bank, Indian Bank, and Bank of Maharashtra have declined by as much as 13 percent since October 2024. Despite this dip, they have shown resilience during the market turbulence, especially compared to large-cap stocks like Asian Paints, Bajaj Auto, Eicher Motors, SBI Life, and Nestle India, which have plummeted between 20-30 percent during the same time period.

Market analysts see banks as a relatively safer haven with possibility of stable growth combined with relatively low valuations. They suggest that measures such as rationalising income tax in the upcoming Budget could help increase disposable income, supporting lagging deposit and credit growth in the banking system and aid earnings growth for bank stocks. Here’s Moneycontrol’s analysis of what more the banking sector hopes to see from the 2025 Union Budget.

Capex-led growth

Analysts expect the government to maintain a strong focus on capital expenditure in the upcoming budget, particularly in infrastructure projects such as roads, railways, and urban development. This push for capex is likely to drive economic growth while creating investment opportunities across sectors, which in turn could boost credit demand for banks.

"We anticipate this budget will continue to emphasise capex, which could act as a trigger to support corporate credit growth for banks," said analysts at Axis Securities, who have reiterated their positive stance on shares of SBI, Bank of Baroda, Canara Bank, HDFC Bank, and ICICI Bank.

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Brokerages believe the worst of the capex slowdown is behind us. Elara Capital estimates capex to grow by 14 percent year-on-year to Rs 11.3 lakh crore in FY26E, compared to Rs 9.9 lakh crore in FY25E, when election-related uncertainty dampened spending.

Income tax rationalisation

As taxpayers gradually shift towards the new tax regime with reduced exemptions, it becomes imperative to rationalise tax slabs in the absence of major deductions and other incentives, said Vimal Nadar, Senior Director - Research at Colliers India. Nadar believes that introduction of additional tax slab of 25 percent for income levels between Rs 15-20 lakh would provide significant tax relief and increase disposable income.

An increased liquidity in the hands of individuals will hold higher potential to spur consumption and support credit and deposit growth. Additionally, the proposal to exempt income tax up to Rs 10 lakh will surely scale-up liquidity in the hands of middle-class salaried individuals, Nadar added.

Addressing stress in the microfinance sector

The microfinance sector, grappling with challenges such as high default rates, constrained liquidity, and rising operational costs, is in need of substantial government intervention, believe experts. Analysts at Axis Securities advocate government to establish a dedicated funding window to ensure that MFIs have steady access to affordable capital. This would help alleviate liquidity concerns and enable them to continue providing small-ticket loans to underserved communities.

Adjustments to the existing qualifying assets criteria like broadening the scope of eligible borrowers, increasing permissible size or repayment terms of loans could also allow MFIs greater flexibility in disbursing loans. Additionally, a government-backed credit guarantee scheme could be introduced to mitigate the risk associated with lending to microfinance borrowers, who often lack collateral, added Axis Securities. If these measures are introduced in the Budget, it would be positive for shares of CreditAccess Grameen, Fusion MFI, Satin Creditcare, and Spandana Sphoorty.

Tax incentives for deposits

The banking industry has advocated for measures to make bank deposits more attractive, particularly as deposits as a proportion of household financial assets have fallen from 56.4 percent in FY20 to 45.2 percent in FY24. Experts proposed taxing interest income from deposits at a lower rate to encourage savings in banks and reducing the lock-in period for fixed deposits, making them more appealing to retail investors.

These proposals come at a time when more individuals are turning to mutual funds and stock markets. SIP investments reached a record Rs 26,459 crore in December 2024, even as the stock market's bull run halted in October 2024.

Disinvestment progress and targets

The slow pace of disinvestment this financial year has resulted in a significant gap between budgeted expectations and actual realization. Receipts have reached only Rs 8,630 crore as of January 2025, falling far short of the Rs 78,000 crore target for FY25BE.

Contributions from Hindustan Zinc (via the offer-for-sale method) and the General Insurance Corporation of India have made up the bulk of this amount.

For FY26, experts expect the government to set a more realistic target of Rs 65,000–70,000 crore. Potential candidates for disinvestment include IDBI Bank, Central Bank of India, and BEML. Among these, IDBI Bank is a key pick, given its ongoing privatisation process, according to Narinder Wadhwa, MD and CEO of Ski Capital Services.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.