Bank Stock Picks: India’s banking sector ended the fourth quarter of FY26 on a strong note, supported by healthy credit demand, improving asset quality and a growing focus on strengthening balance sheets, according to a report by Nirmal Bang Institutional Equities. The brokerage said banks delivered robust earnings growth despite global uncertainties, including geopolitical tensions in West Asia. Loan growth remained healthy across retail, SME and corporate segments, while lenders continued to focus on building stable deposit franchises.
The report also highlighted improving asset quality metrics across the sector, stabilisation in unsecured lending, and increasing adoption of artificial intelligence and generative AI tools to improve customer service and operational efficiency.
Banking Sector Shows Resilience
According to Nirmal Bang, earnings of banks under its coverage rose 17% year-on-year in the fourth quarter of FY26.
“Management across large banks highlighted a focus on balance sheet resilience as core themes for the quarter,” the brokerage said.
The report noted that loan growth was driven primarily by retail, SME and an emerging revival in corporate credit demand. At the same time, banks continued to prioritise retail deposit mobilisation over high-cost bulk deposits to better manage funding costs.
While public sector banks were seen as having sufficient liquidity to support future growth, private sector banks continued to face challenges in attracting deposits.
Margins Under Pressure, But Stabilisation Visible
Net Interest Margins (NIMs) remained under pressure during the quarter due to sticky deposit rates and the transmission of policy rate cuts.
However, several banks indicated that margins are beginning to stabilise.
“NIMs faced sequential compression due to sticky deposit pricing and the pass-through of rate cuts, but several banks signalled structural stabilisation and early signs of margin expansion into 1QFY27,” the report said.
Asset Quality Continues to Improve
The brokerage highlighted further improvement in asset quality across the banking system.
Gross and net non-performing asset ratios fell to multi-year lows, while slippages moderated. The report added that stress in unsecured personal loans and credit card portfolios has largely stabilised.
“We expect asset quality to remain benign going forward as unsecured PL/CC segments have stabilised, retail CV remains under some stress, and MFI is stabilising and expected to improve,” Nirmal Bang said.
Banks are expected to move from a phase of contraction to calibrated growth in FY27, supported by stronger underwriting standards and lower slippages.
AI and GenAI Become Key Focus Areas
The report pointed to a growing adoption of AI and generative AI technologies across the banking sector.
“A significant structural shift is the decisive integration of artificial intelligence and GenAI platforms,” the brokerage said.
Gold Loan NBFCs Benefit From Rising Gold Prices
Among specialised NBFCs, gold loan companies reported strong growth in assets under management (AUM), aided by higher gold prices.
The brokerage noted that higher gold prices led to increased loan-to-value churn at Muthoot Finance, resulting in a decline in gold tonnage. In contrast, Manappuram witnessed improvement in both tonnage and customer additions.
HUDCO Maintains Strong Growth Momentum
According to the report, sanctions increased 29% year-on-year, while disbursements rose 28%. Gross NPA improved to 1.04%.
“The management targets ‘Zero Net NPA’ within 18 months,” the report said.
HUDCO is also increasing its focus on urban redevelopment through its Urban Invest Window (UiWIN) initiative and aims to build an AUM of Rs 3 trillion by 2030.
Housing Finance Companies Shift Towards High-Yield Segments
The report said housing finance companies (HFCs) reported record disbursements in the fourth quarter and are targeting strong growth in FY27.
To offset margin pressure from intense competition, many HFCs are increasing exposure to higher-yield segments such as affordable housing, emerging markets and loan against property (LAP).
The brokerage added that technology and AI integration are increasingly becoming important differentiators for faster loan processing, operational scalability and collection management.
Nirmal Bang said it prefers larger banks with strong deposit franchises, adequate capital buffers and consistent asset quality performance.
Among housing finance companies, the brokerage said it remains positive on Can Fin Homes and Home First Finance.
“In prime HFCs, we are positive on Can Fin Homes due to expectations of a pickup in loan growth ahead. In AHFCs, we like Home First Finance due to our estimation of loan CAGR of 25% over FY26-28E driven by continued investments in distribution, people, technology, and improved regional conditions,” it added.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
