Global brokerage Nomura stated that the Indian banking sector is turning a corner, with profitability set to improve after several quarters of pressure from shrinking net interest margins (NIMs) and elevated credit costs.
Key Observations from Q2 FY26:
- NIM Compression Bottoming Out: The latest earnings suggest the squeeze on margins has likely troughed.
- Credit Costs to Ease: Stress in unsecured retail and microfinance portfolios is easing, which should help lower credit costs.
Growth and Profitability Outlook:
- Credit Growth: Nomura expects system credit growth to accelerate to 13% in FY26 and 14% in FY27, up from 11% as of October 2025, supported by fiscal and monetary policies.
- Return on Assets (RoA): Aided by lower credit costs, sector RoA is projected to expand by 15 basis points over FY26-28.
- Earnings Growth: The brokerage forecasts a strong 16% earnings CAGR over FY26-28, more than double the 7% CAGR recorded in the previous two-year period.
Valuation and Sector View:
Nomura believes valuations remain attractive at 2.1x one-year forward price-to-book. The combination of improving RoAs and a robust earnings trajectory supports the case for a sector re-rating.
Top Picks and Sector Preferences:
Nomura prefers banks with strong return profiles, clean balance sheets, and solid liability franchises. Its top picks are:
- Axis Bank
- ICICI Bank
- State Bank of India (SBI)
Broader Sector Preferences:
- Private Banks: Favors Axis Bank (improving growth, asset quality) and ICICI Bank (compounding play). HDFC Bank ('Buy' rated) needs to demonstrate stronger deposit mobilization.
- Public Sector Banks: Prefers SBI over Bank of Baroda due to stronger core profitability.
- Mid-Tier Banks: Likes IndusInd Bank as a turnaround candidate. Maintains a 'Neutral' on AU Small Finance Bank (valuations capture positives) and Bandhan Bank (balances valuation comfort with asset quality concerns).
Key Risks:
Nomura flagged subdued loan growth, aggressive rate cuts, and a deterioration in asset quality as the primary risks to its bullish view.