HDFC Bank, ICICI Bank Remain BofA’s Top Picks As Growth Outlook Improves Despite Rate Cut Risks

HDFC Bank Ltd. and ICICI Bank Ltd. remain among the top picks of Bank of America (BofA) as the brokerage in its note on Thursday maintained a constructive view on the banking sector, supported by an improving growth outlook, even as concerns around further interest rate cuts remain an overhang.

For the December quarter of this fiscal, the sector is expected to deliver a largely stable performance. Healthy loan growth is likely to be partially offset by range-bound net interest margins (NIMs), lower treasury gains and elevated credit costs for banks with exposure to the microfinance (MFI) segment. Overall, BofA expects system credit conditions to remain resilient, with growth acting as the primary earnings driver rather than margin expansion.

Loan growth across the system has continued to improve and is tracking at around 4% quarter-on-quarter and 12% year-on-year as of mid-December. BofA expects most banks to report loan growth in the range of 3–5% quarter-on-quarter in the third quarter, which remains a key positive for the sector.

However, deposit growth continues to lag, intensifying competition for liabilities and acting as a structural constraint. Additionally, the possibility of further policy rate cuts poses risks to margins, prompting BofA to revise its earnings estimates to incorporate the impact of a 25 basis point rate cut alongside an improving growth trajectory.

Net interest margins are expected to remain broadly stable for large private sector banks. A mixed margin trend is likely, with loan repricing benefits being offset by deposit rate cuts, CRR adjustments and differences in the timing of rate cut pass-through.

Public sector banks may see a modest 3–5 basis point impact from the latest rate cut, while mid-sized banks are expected to report marginal sequential improvement in NIMs, supported by better loan growth and lower funding costs.

Operating expenses are likely to increase sequentially due to festive season offers and business investments, though year-on-year cost growth is expected to remain under control.

On asset quality, BofA expects a gradual recovery to continue. Unsecured portfolio trends are likely to improve further, though normalisation in the MFI segment is still a few quarters away.

Mid-sized banks with higher MFI exposure may report elevated slippages in quarter ended December, while large private banks and public sector banks are expected to see some impact from agricultural seasonality. Credit costs for mid-sized banks are likely to ease sequentially but remain above normal levels, while public sector banks may further lower their credit cost guidance.

Within this sector backdrop, BofA continues to favour large private banks, maintaining a Buy rating on both ICICI Bank and HDFC Bank.

ICICI Bank is seen as attractively valued at around 2x financial year 2027 price-to-book, offering strong earnings visibility. The brokerage expects ICICI Bank to report an improvement in loan growth compared with the previous quarter, along with stable NIMs and credit costs.

While operational performance remains solid, uncertainty around the extension of the bank’s CEO continues to be a near-term overhang for investors.

HDFC Bank also remains a preferred pick for BofA, with the brokerage maintaining a Buy rating and highlighting attractive valuations of around 2.1–2.2x FY27 standalone price-to-book.

For HDFC Bank, investor focus is on the sustainability of loan growth, particularly in the context of relatively weak deposit growth so far in fiscal 2026. Commentary around the NIM trajectory for FY27 will be closely watched, as a sustained improvement in loan growth momentum is seen as key to driving the next phase of stock re-rating.