The Indian banking sector is navigating a tricky phase marked by slowing loan growth, margin pressures, and elevated credit costs. However, brokerage houses Motilal Oswal and Nomura believe the cycle of earnings downgrades is nearing its end, with strong banks well placed to lead the next leg of growth.
Earnings Pressure, But Bottoming Out Soon
According to Motilal Oswal, consensus estimates for banks’ earnings in FY26 have been trimmed sharply, particularly for mid-sized lenders exposed to microfinance and unsecured retail segments. Bandhan Bank, Equitas, IDFC First Bank, and RBL Bank have seen cuts of 41-95 percent to FY26 earnings forecasts. Larger diversified banks, however, have shown greater resilience. ICICI Bank, HDFC Bank, and State Bank of India have seen only modest revisions and remain top picks.
Motilal Oswal expects muted earnings growth of just 2 percent in FY26 but projects a strong rebound of around 16 percent in FY27, helped by deposit repricing, CRR cuts, and improving credit costs. “We expect earnings growth to bottom out in FY26, with a recovery to 16% in FY27 and an EPS CAGR of 17% over FY26-28,” the brokerage said.
Asset Quality Showing Early Signs of Stability
Nomura’s September report highlights stabilising trends in asset quality. Personal loans and credit card delinquencies have moderated, while microfinance portfolios are showing gradual improvement despite pockets of stress. Importantly, small business loans-an area of concern-have seen stable performance for banks, even as NBFCs and small finance banks struggle with rising delinquencies.
Nomura expects overall system credit growth to improve from 10 percent currently to 12 percent by FY26, supported by RBI’s liquidity easing and tax relief measures. “We think FY26 will be a year of transition, with bottoming loan growth and moderating asset-quality risks, setting the stage for stronger earnings in FY27,” it noted.
Top Picks for Investors
Both Motilal Oswal and Nomura converge on ICICI Bank and SBI as standout investment ideas. ICICI is praised for its strong liability franchise and diversified growth drivers. Nomura values ICICI at 2.8x Jun-27F BVPS, setting a target price of ₹1,740 against the current ₹1,419, while Motilal Oswal highlights its steady performance and limited earnings downgrades relative to peers, making it one of their preferred large-cap picks.
SBI, meanwhile, is backed by its dominant market share and improved asset quality. Nomura has a target price of ₹980 compared to the current ₹825, and Motilal Oswal notes that SBI’s earnings visibility remains robust, with expectations of healthy profitability supported by loan growth recovery and stable asset quality.
HDFC Bank also remains a core recommendation across brokerages. Nomura sees the stock at 2.1x Jun-27F BVPS, with a target price of ₹2,050 against the prevailing ₹1,575. Motilal Oswal continues to prefer HDFC Bank among the large private sector lenders, citing its ability to deliver steady earnings growth once temporary regulatory and deposit-related headwinds subside.
Axis Bank features prominently in Nomura’s list, with a sum-of-the-parts target price of ₹1,400 versus the present ₹1,104, supported by improved asset quality and growth prospects. Motilal Oswal, while slightly more cautious, continues to prefer Axis in the mid-to-large bank segment alongside AU Small Finance Bank, given its improving fundamentals and earnings potential.
Outlook
While the near term may remain bumpy with weak loan growth and lingering stress in unsecured portfolios, the medium-term outlook is turning constructive. With deposit costs easing, liquidity improving, and credit quality stabilising, the stage is set for a sector-wide rebound led by quality names. For investors seeking exposure to India’s banking recovery, ICICI Bank, SBI, HDFC Bank, and Axis Bank stand out as the top picks.