Axis Bank and DCB Bank Among Top Picks as Banking Sector's Net Interest Margins Show Signs of Stabilization

Banking Sector Reports Mixed Earnings Growth in Q4 FY26

The banking sector's performance in the fourth quarter of FY26 was marked by a mixed bag of earnings growth, with private banks reporting relatively stronger results compared to state-run lenders. According to a recent analysis, private banks saw their net interest income (NII) growth and net interest margin (NIM) stabilize across most large private banks, offsetting yield pressures from the repo rate cut. This was largely due to the repricing benefits from Savings Accounts and Term Deposits.

However, corporate credit demand pressurized NIMs for PSU banks, with State Bank of India (SBI) seeing the highest hit at 18 basis points (bps) sequentially. Management guidance across most banks points to NIMs bottoming in Q4, with stable to improving trends ahead.

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The banking sector Q4 results also showed improvement in business momentum, with sequential pickup in credit and deposit growth across banks. Advances growth was healthy across most bank groups, and deposit mobilization held up well, though deposit growth lagged advances growth, with the system Liquidity-Debt Ratio (LDR) at 82%. Across the banking sector, management teams have remained relatively optimistic on FY27 credit growth.

Asset quality remains comfortable, with gross non-performing assets (NPA) ratios declining across most banks and slippages moderating for lenders most exposed to MFI and unsecured retail stress. Credit costs trended lower in line with improving portfolio quality, with several banks using the quarter's earnings headroom to build standard asset and contingent provision buffers.

Equirus Securities Prefers Private Banks

Equirus Securities prefers private banks in the financial sector, citing consistent credit growth exceeding deposit growth for PSU banks, moderating LCR ratios, and an uptick in systemic credit growth. The brokerage expects repo hikes in the second half of FY27, which would be NIM supportive for private banks. Within large private banks, it prefers Axis Bank, while within mid-private banks, it likes Karur Vysya Bank and DCB Bank.

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Equirus Securities has upgraded its ratings on IndusInd Bank shares to 'Add' from 'Reduce', with a target price of ₹950 per share. It upgraded RBL Bank to 'Long' from 'Add' with a target price of ₹390. The brokerage firm has a 'Long' rating on Karur Vysya Bank with a target price of ₹360, and an 'Add' call on AU Small Finance Bank with a target price of ₹1,145, driven by lower credit costs, improving asset quality, and better operating performance.

The brokerage broadly retained its estimates and ratings for key private and public sector lenders, maintaining a 'Long' rating on ICICI Bank, Axis Bank, HDFC Bank, DCB Bank, Federal Bank, and Union Bank of India, while retaining an 'Add' rating on Bank of Baroda. However, it lowered its earnings estimates for SBI, cutting FY27E NII and PAT estimates by 4% and 2%, respectively, citing yield pressure arising from a higher T-Bills-linked corporate loan mix.