Synopsis : India's banking sector is expected to deliver another healthy quarter despite continued pressure on margins. JM Financial believes strong loan growth, stable asset quality and improving treasury income will support earnings, while naming six banks as its top investment picks for FY27.
Rephrased Article
India's banking sector is preparing for the first-quarter FY27 earnings season with expectations of another solid performance. While banks continue to face pressure on net interest margins due to rising funding costs, healthy credit growth, stable asset quality and improving treasury income are expected to support profitability.
According to JM Financial, the sector continues to maintain strong business momentum despite deposits growing at a slower pace than loans. This has pushed credit-to-deposit ratios higher across several banks, making deposit mobilisation one of the most important themes investors should monitor over the coming quarters.
JM Financial's preferred banking stocks
JM Financial has identified six banks as its preferred investment ideas for FY27:
- ICICI Bank
- Axis Bank
- State Bank of India (SBI)
- Ujjivan Small Finance Bank
- DCB Bank
- City Union Bank
The brokerage believes these lenders stand out because of their healthy business growth, diversified lending portfolios, improving operating performance and stable asset quality, positioning them well to deliver consistent earnings despite near-term challenges.
Strong loan growth continues to support the sector
Business activity remained healthy during the April-June quarter. Based on provisional updates from 28 banks, JM Financial estimates overall loan growth at around 16.4% year-on-year, while deposit growth stood at approximately 12.3%.
Among private sector lenders, Axis Bank reported one of the strongest loan growth numbers, followed by HDFC Bank and Kotak Mahindra Bank. Small finance banks also continued to perform well, with Ujjivan Small Finance Bank and Equitas Small Finance Bank delivering loan growth exceeding 25% year-on-year.
The brokerage also noted that recent RBI data indicates incremental lending has largely been driven by corporate borrowers and NBFCs, while retail credit growth has remained relatively stable.
Margin pressure remains a key concern
Despite healthy credit growth, JM Financial expects net interest margins (NIMs) to remain under pressure during the quarter.
The brokerage believes faster growth in lower-yield lending segments such as corporate loans and home loans, along with increased reliance on high-cost Certificates of Deposit (CDs), has pushed funding costs higher.
Seasonal agricultural loan slippages during the first quarter could also weigh on margins.
Even so, JM Financial expects Net Interest Income (NII) across its banking coverage universe to grow by around 11% year-on-year.
Asset quality continues to improve
Asset quality remains one of the biggest positives for the banking sector.
According to JM Financial, stress in unsecured retail loans and microfinance portfolios continues to moderate, while collection efficiency remains healthy across most lenders.
The brokerage highlighted that Ujjivan Small Finance Bank reported another quarter of improving Gross Non-Performing Assets (GNPA), while Bandhan Bank maintained stable collection efficiency.
Stable credit costs are also expected to support overall profitability despite ongoing pressure on margins.
Key factors investors should monitor
JM Financial expects banking sector earnings to remain resilient, supported by improving treasury gains as bond yields soften and operating expenses grow at a slower pace than balance sheet expansion.
However, investors should continue monitoring several important factors, including:
- Deposit mobilisation and funding costs
- Liquidity Coverage Ratio (LCR) trends following regulatory changes
- FCNR(B) deposit mobilisation
- Implementation of ECLGS 5.0
- Asset quality in SME and unsecured retail lending
These factors are likely to determine whether earnings momentum remains intact over the coming quarters.
Conclusion
Although margin pressure remains a challenge, India's banking sector continues to benefit from strong loan growth, improving asset quality and stable business momentum. JM Financial believes ICICI Bank, Axis Bank, SBI, Ujjivan Small Finance Bank, DCB Bank and City Union Bank are well positioned to navigate the current environment and deliver healthy earnings growth throughout FY27.
Disclaimer : The views, ratings and target opinions mentioned in this article are those of JM Financial and are intended solely for informational purposes. They should not be construed as investment advice or a recommendation to buy, sell or hold any security. Investments in banking stocks are subject to market risks, interest rate movements, regulatory changes and macroeconomic conditions. Investors should conduct their own research and consult a SEBI-registered investment advisor before making any investment decisions.
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