Motilal Oswal, a brokerage firm, has identified its top picks in the banking sector, selecting ICICI Bank, HDFC Bank, and SBI due to their strong balance sheets, healthy provisions coverage ratio, and relatively better growth prospects. The firm’s report highlights the current challenges facing the banking sector, including margin pressures and lending rates. Following a 100 basis point repo cut in CY25, system yields have eased by approximately 50 basis points, although some large private banks have reported only limited declines.
The report notes that banks are navigating a tricky environment, with the Weighted Average Lending Rate (WALR) on fresh loans declining 45 basis points over the past six months. Private banks have experienced a sharper drop of 58 basis points, while public sector banks have seen a 41 basis point reduction. Furthermore, the WALR on outstanding loans for the system has eased 6 basis points month-on-month, reflecting a slower pace of decline for public sector banks compared to private banks.
Motilal Oswal expects deposit costs to moderate gradually as term deposits reprice over the second half of FY26, providing support for margin recovery. The firm also anticipates that Q2FY26 will be the most challenging quarter for banks, marked by sharper NIM contraction, muted loan growth, and persistent stress in segments like unsecured and commercial vehicle loans. However, a recovery is expected from Q3FY26, supported by CRR cuts and a pick-up in demand led by reductions in GST and income tax rates.
The report emphasizes the importance of strong liability profiles in cushioning margin stress and ensuring balance sheet resilience, particularly as loan growth remains muted. From Q3 onwards, NIMs are expected to benefit from deposit repricing and phased CRR cuts, while asset quality pressures in unsecured retail and microfinance segments show early signs of stabilization. Overall, Motilal Oswal’s top picks in the banking sector are well-positioned to mitigate downside risks to earnings and capitalize on growth opportunities.