Banking sector Q1 preview: Margins to remain under pressure in 1HFY26, says MOSL; likes ICICI, HDFC, SBI

Mint

2 days ago

Motilal Oswal Financial Services (MOSL) has released its latest sector update for the Indian banking space, projecting a cautious yet optimistic outlook for FY26. The brokerage anticipates systemic credit growth to revive in the second half of the fiscal and has identified ICICI Bank, HDFC Bank, and State Bank of India (SBI) as its top stock picks. MOSL expects improving margins, easing deposit costs, and stable asset quality to support performance in key lenders.
MOSL said it remains positive on ICICI Bank, HDFC Bank, and SBI owing to their robust loan growth, strong asset quality, and stable returns outlook. These banks are expected to outperform peers through FY27, backed by well-diversified loan portfolios, disciplined provisioning, and efficient deposit mobilization.
MOSL noted that systemic credit growth slowed to 9.6% as of mid-June 2025 due to cautious lending in the unsecured retail segment and moderation in retail demand. While the incremental Credit-Deposit (CD) ratio dropped to 74%, the overall CD ratio remains elevated at 79%. The brokerage projects credit growth to recover to 11.5% YoY by FY26, with a stronger revival expected in the second half of the fiscal year.
Meanwhile, systemic deposit growth stood at 10.4% in June 2025, with MOSL observing a slowdown in low-cost Current and Savings Account (CASA) deposits. The decline in policy rates has led banks to reduce Savings Account (SA) and Term Deposit (TD) rates by 25–100 basis points since April. MOSL expects muted deposit growth in Q1FY26, with funding costs easing gradually as banks reprice liabilities.
MOSL also estimates that banking sector Net Interest Margins (NIMs) will decline sharply in the first half of FY26, as lower lending yields precede a reduction in funding costs. Lending rates have already started to compress due to repo rate cuts, but the benefit of lower deposit rates is yet to fully materialize. MOSL said that margins may recover in the second half of the year, aided by a 100 basis point CRR cut effective September 2025 and improved system liquidity.
While large lenders continue to report stable asset quality, MOSL flagged elevated stress in unsecured Microfinance (MFI) segments. The brokerage expects large PSU and private banks to maintain controlled credit costs, while mid-sized lenders with higher retail exposure may witness elevated provisioning, particularly in the first half of FY26.
MOSL forecasts earnings for its banking coverage universe to grow at 11.1% CAGR between FY25 and FY27. Net Interest Income (NII) is expected to grow 3.1% YoY and remain flat quarter-on-quarter in Q1FY26.
Private bank PAT is seen declining 2.5% YoY, while PSU bank PAT is expected to rise 4.8% YoY. Overall, MOSL expects muted Q1 earnings, with a pick-up anticipated in the latter half of FY26.
MOSL expects PSU banks to report a modest 4.8% YoY PAT growth in Q1FY26, weighed by lower NIMs and higher provisioning. NII is forecast to remain flat YoY and down 1.8% QoQ. The brokerage projects a 6% CAGR in PAT for PSU banks over FY25–27, supported by better treasury income and stable asset quality.
Moreover, MOSL expects mixed results among Small Finance Banks. AUBANK is projected to report a 9.8% QoQ rise in PAT aided by lower credit costs. However, Equitas Bank is likely to post a 15% YoY decline in PAT due to margin compression and higher provisioning.
ICICI Bank: MOSL reiterated a 'Buy' rating on ICICI Bank, citing consistent 16% loan CAGR over FY22–25. Asset quality remains robust with GNPA at 1.67% and a strong PCR of 77%. NIM surprised positively at 4.41% in Q4FY25. CASA ratio improved to 41.8%. MOSL estimates RoA/RoE to reach 2.3%/17.5% by FY27E.
HDFC Bank: MOSL said HDFC Bank is well-positioned post-merger with strong deposit growth at 14% YoY and improved NIM at 3.54%. GNPA/NNPA stood at 1.33%/0.43%. The bank's cost-to-income ratio improved to 39.8%, and RoA/RoE is projected at 1.9%/14.7% by FY27E.
SBI: MOSL expects SBI to maintain its growth momentum, aided by a 12.4% loan growth in FY25 and strong retail traction. GNPA/NNPA improved to 1.82%/0.47%, and credit costs are expected to stay at 40–50 bps. SBI's digital platform YONO now has 88 million users, helping drive efficiency. RoA/RoE is projected at 1.0%/15.6% by FY27E.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.