Banking Stocks: Brokerage firm ICICI Securities has reiterated its constructive stance on the banking sector, highlighting large private sector banks as its top picks amid improving growth visibility and attractive valuations. The firm prefers Axis Bank, HDFC Bank and Kotak Mahindra Bank (all rated Buy), citing a favourable risk-reward equation, while maintaining an ‘Add’ rating on IDFC First Bank and Federal Bank, and a more cautious ‘Hold’ stance on Yes Bank and IndusInd Bank. Among regional players, South Indian Bank emerges as a preferred choice over Karur Vysya Bank and City Union Bank.
The brokerage’s optimism stems from signs of stabilisation in core earnings metrics, with net interest income (NII) and profit growth appearing to have bottomed out. In Q4FY26, private banks finally saw sequential loan growth converge with PSU banks, marking a shift after several quarters of divergence. Despite still trailing PSU peers on a year-on-year basis in loan growth, private lenders delivered superior NII and profit growth, supported by better asset quality and operating efficiency. System-wide slippages also eased to multi-quarter lows, largely driven by private banks, although PSU banks saw some seasonal stress in SME portfolios.
Banking Sectoral Growth
Growth dynamics in the sector are also showing signs of improvement. System-wide loan growth picked up to 15–16 per cent YoY, aided by wholesale lending, even as retail demand (excluding gold loans) remained relatively soft. ICICI Securities notes that competitive intensity is easing for private banks, helped by stabilising deposit costs, improving risk-adjusted returns on corporate loans, and moderation in unsecured asset quality concerns. At the same time, PSU banks, despite enjoying strong growth earlier, are now seeing pressure build on liquidity.
A key shift during the quarter was visible in liquidity metrics. The Liquidity Coverage Ratio (LCR) gap between PSU and private banks narrowed sharply, as PSU lenders consumed excess liquidity buffers. While PSU banks still hold higher LCR levels on average, the gap has reduced meaningfully, potentially forcing them to compete more aggressively for deposits or moderate credit growth. This, in turn, could benefit private banks, which have been more disciplined on balance sheet management.
FY2027 Outlook
Looking ahead, ICICI Securities believes that while macro risks such as crude oil volatility and currency movements remain, the overall outlook for the banking sector remains favourable. The brokerage expects NII growth to outpace loan growth in FY27, as margin pressures ease after a prolonged phase of compression. It also projects earnings (PAT) for its coverage universe to grow at over 15 per cent CAGR between FY26 and FY28.
Valuations further strengthen the case, with most banking stocks trading near or below long-term averages, even as return ratios such as RoA and RoE remain healthy. While risks from global uncertainties and geopolitical developments persist, ICICI Securities believes the sector is well placed to navigate these challenges, with large private banks standing out as the most attractive opportunities in the current cycle.
(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.)
