L&T Finance UBS Upgrade: Can ROA Reach 3%?

L&T Finance shares came into focus on September 23, 2026 after UBS upgraded the stock to Buy from Neutral and raised its target price to ₹380 from ₹350. The stock rose as much as 2.56% intraday to ₹312.70 following the upgrade. But the more interesting part of the UBS call is not the target price. It is the assumption behind it: L&T Finance may be getting closer to generating a materially higher return from its balance sheet.

That argument has some evidence behind it. L&T Finance's loan book grew 27% year-on-year to ₹1.30 lakh crore in Q1 FY27, profit after tax increased 29% to ₹902 crore and return on assets, or ROA, improved to 2.48%. At the same time, personal loans are becoming a much larger part of the business.

The question for investors is therefore changing. L&T Finance has already transformed itself into an almost entirely retail lender. What now matters is whether this new business mix can lift ROA towards 3% while keeping credit costs under control.

Why Did UBS Upgrade L&T Finance?

UBS's call is partly a sector view. The brokerage expects India to enter another stronger unsecured credit cycle, led by personal loans, and estimates personal-loan growth of around 30% for NBFCs. It believes healthier asset quality, liquidity availability and renewed lender appetite for unsecured credit could support this growth.

L&T Finance fits directly into that argument. Its personal-loan book stood at ₹16,917 crore in Q1 FY27, up 80% from ₹9,383 crore a year earlier. More strikingly, quarterly personal-loan disbursements more than doubled from ₹1,942 crore to ₹4,380 crore. Personal loans now account for roughly 13% of the company's overall AUM.

UBS consequently raised its FY28 EPS estimate to ₹21 from ₹20.20. It also increased the valuation multiple applied to those earnings from 17 times to 18 times, leading to the ₹380 target.

That distinction matters. UBS has not merely increased its earnings forecast by around 4%. It is also willing to assign a higher multiple to those earnings. In effect, the brokerage is arguing that if L&T Finance delivers better profitability with stable asset quality, the quality of those earnings may deserve a higher valuation as well.

L&T Finance's Retail Transformation Is Largely Done

A few years ago, the central question around L&T Finance was whether it could successfully move away from a wholesale-heavy lending model. That question is largely behind it.

Retailisation has increased from just 54% in Q1 FY23 to 98% in Q1 FY27. The retail book has reached ₹1,27,535 crore, up 28% year-on-year, while the remaining wholesale book has fallen to just ₹2,098 crore. The company made no fresh wholesale disbursements during Q1.

The important shift now is from transformation to monetisation.

Becoming a retail lender by itself does not guarantee superior profitability. Retail lending involves higher distribution, technology, servicing and collection costs. The business becomes more valuable when scale allows these expenses to grow slower than the loan book, while product mix generates adequate yields and credit losses remain controlled.

That appears to be the next phase L&T Finance is trying to enter.

Can Personal Loans Become the Next Earnings Driver?

Personal loans have obvious attractions for a lender. They generally carry higher yields than secured products, require less physical distribution and can be sourced digitally at scale. But there is no collateral sitting behind the loan, which means underwriting quality matters much more.

L&T Finance is increasingly originating these loans through digital partners including CRED, Google Pay, PhonePe and Amazon. Management says it is predominantly targeting salaried borrowers, with an average personal-loan ticket size of around ₹2.6 lakh to ₹2.8 lakh. It has also embedded its Cyclops underwriting system into these journeys and recently added its Nostradamus portfolio-monitoring system.

There is an important reality check, however. Management itself has acknowledged that the 126% growth in personal-loan disbursements partly reflects a low base and expects the percentage growth rate to moderate as the portfolio becomes larger.

That is actually healthier than assuming triple-digit growth can continue indefinitely. The investment case does not need personal loans to keep growing at 126%. It needs them to become a larger, profitable part of the portfolio without causing credit losses to rise faster than the additional income they generate.

What Has to Happen for L&T Finance's ROA to Reach 3%?

This is where the UBS thesis becomes measurable.

L&T Finance itself has set a Lakshya 2031 target of 3.0% to 3.2% ROA, alongside more than 20% book growth, credit costs below 2% and ROE of 16% to 18%. Management has also said it is working towards reaching an ROA threshold of 2.8% by Q4 FY27.

The company has already made some progress:

*Q1 FY26 credit cost shown before utilisation of macro-prudential provisions.

What is particularly useful is that management has explained where it expects the additional ROA to come from.

It expects roughly 20 basis points eventually to come from the disappearance of the drag created by the residual ARC portfolio. Another 30-40 basis points could come from lower credit costs and lower credit-administration expenses, while business mix and operating efficiencies could contribute the balance.

That makes credit cost arguably more important to the investment case than headline loan growth.

To understand the scale, L&T Finance had an average book of ₹1,26,074 crore in Q1 FY27. On that base, every 10 basis points of credit-cost improvement is roughly ₹126 crore of annualised pre-tax impact, as a simple illustration. Moving from 2.54% towards 2% would therefore be financially meaningful, although the actual impact will depend on loan growth, portfolio mix and future delinquencies.

The Bigger Risk Is What Happens When These Loans Season

So far, asset-quality trends are moving in the right direction.

Consolidated Gross Stage 3 assets improved to 2.86% in June 2026 from 3.31% a year earlier, while Net Stage 3 improved to 0.90% from 0.99%. The retail portfolio looks slightly better, with Gross Stage 3 at 2.48% and Net Stage 3 at 0.77%.

But there is an important warning buried underneath those improving numbers.

CRISIL notes that L&T Finance's personal-loan and SME portfolios have expanded rapidly but have not yet gone through complete economic cycles at their current scale. It therefore identifies the ability to maintain asset quality as these newer portfolios mature as a key monitorable.

That is probably the most important counterweight to the UBS thesis.

AI-based underwriting, better borrower selection and predominantly salaried customers can improve risk management, but they cannot eliminate the credit cycle. The real test comes when a rapidly expanding unsecured portfolio has been on the books long enough for delinquencies to fully emerge.

For investors, personal-loan growth should therefore never be viewed independently of credit cost and delinquency trends.

The 3% ROA Story Is Not Just About Higher Lending Margins

Interestingly, Q1 FY27 already demonstrates why.

L&T Finance's lending yield was broadly unchanged at 14.81%, while its NIM actually declined sequentially from 8.78% to 8.54%. Higher fee and other income offset that decline, keeping NIM plus fees stable at 10.47%. At the same time, operating expenses fell to 4.03% and credit cost improved to 2.54%.

Yet ROA still increased to 2.48%.

That tells us something important about the route towards 3%. L&T Finance does not necessarily need a dramatic expansion in lending spreads. A combination of scale, cross-selling, falling operating costs, lower credit losses and the gradual removal of legacy wholesale drag can do much of the work.

This arguably makes the profitability thesis more credible, but also makes execution more important. There is no single lever that can deliver the entire improvement.

What Does the UBS Upgrade Really Mean for L&T Finance Investors?

UBS's ₹380 target is based on 18 times its revised FY28 EPS estimate of ₹21. In other words, the brokerage is effectively assuming both higher future earnings and greater investor willingness to pay for those earnings.

That second assumption deserves attention.

A higher valuation becomes easier to justify if L&T Finance moves towards 3% ROA, keeps personal-loan delinquencies controlled, brings credit cost closer to 2% and continues generating 20%+ loan-book growth. If the unsecured book begins producing higher losses, however, the same growth that currently strengthens the earnings argument could work in reverse.

That is why the UBS upgrade should not be reduced to the ₹380 target price.

The more useful takeaway is that L&T Finance appears to have moved beyond the question of whether it can become a retail NBFC. The question now is whether it can become a high-return retail NBFC.

The next few quarters should offer increasingly clear evidence. Investors should watch the personal-loan book and its delinquency behaviour, credit costs as they move towards management's 2-2.2% Q4 FY27 aspiration, progress towards 2.8% ROA, operating expenses as scale increases and the continued rundown of the legacy wholesale and ARC portfolios.

If those variables move together, the improvement in profitability could prove structural rather than simply a strong phase in loan growth. If they do not, then the 3% ROA assumption becomes much harder to sustain.