HDFC Bank, ICICI Bank Among Motilal Oswal's Top Six Picks In Banking Sector

Motilal Oswal Report

Top picks: ICICI Bank, HDFC Bank, SBI, Federal Bank, and AU Small Finance Bank.

We closely monitor the potential turn in the interest rate cycle and the overall pace of monetary easing, as these factors will significantly impact the underlying margin trajectory.

Additionally, progress in deposit mobilization will be critical, as an elevated CD ratio and rising inflation rates will make it challenging for lenders to reduce deposit rates and, consequently, lower their funding costs.  Banks with a higher proportion of fixed-rate loans and a lower duration of liabilities are expected to report more resilient NIM performance over FY26.

However, we remain cautious about the ongoing delinquency cycle in unsecured loans and the associated interest reversals, as high credit costs and an adverse asset mix will exert pressure on banks’ profitability. 

During Q2 FY25, we have cut aggregate earnings for private banks by 1.1%/0.9% for FY25/26E respectively led by sharper cuts for mid-size banks IndusInd Bank, IDFC Bank, and RBL Bank).

We expect private bank earnings to grow at 16%/18% YoY over FY26/27E respectively, however we see downside risk to this growth in case of rate cuts.

PSU Banks: Earnings momentum of PSU Banks remain strong leading us to raise our FY25 projections by 1.5%. However, with RoA profile nearly maturing, we estimate earnings growth to broadly track loan growth at 10-11% cagr over FY25-27E.

Headwinds on margins and potential rise in credit cost remains a key risk.

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