HDFC Bank, ICICI Bank, Axis Bank are BNP Paribas' top three banking picks; here's why
In the India Banks and Diversified Financials report for November 2026, Chakrabarti said the earnings growth revival thesis for banks remained intact.
- Nov 5, 2026,
- Updated Nov 5, 2026 3:24 PM IST
BNP Paribas in a note said it prefers large private banks over non-banking financial companies (NBFCs), with HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd remaining his top picks in the pecking order. Within the NBFC space, Bajaj Finance Ltd remained its top pick, while SBI Cards is the highest-conviction pick. The analyst's preference for large banks comes amid expectations of an earnings growth revival in FY27, which could emerge as a key re-rating catalyst for the sector.
BNP Paribas said, "The earnings growth revival thesis for banks remained intact." He expects large banks to see benign margin expansion or stable margins starting in the second half of FY27. Along with a favourable margin outlook, this is expected to support reasonable earnings growth momentum during the year.
Banking sector outlook
The report noted that the Reserve Bank of India (RBI) had materially neutralised the liquidity inflow arising from FCNR mobilisation of around $133 billion. The central bank conducted additional open market operations worth Rs 25,000 crore in October, while the outstanding variable rate reverse repo (VRRR) balance declined to around Rs 25,600 crore at the end of October from Rs 1.43 lakh crore at the end of September.
Despite these measures, overnight liquidity remained in surplus at around Rs 1.7 lakh crore. The analyst said durable liquidity was also expected to remain at similar levels by the end of October, with losses from capital account outflows and measures to defend the rupee likely to be offset by incremental bank credit creation. Barring large and continued outflows, liquidity is not expected to constrain credit growth. The report maintained its expectation of 13% year-on-year system credit growth in FY27, while flagging further RBI interventions and its stance on liquidity as a monitorable.
Credit growth remained steady, with system-wide credit and deposit growth at 18.2% and 16.7%, respectively, as of October 15, 2026. On a three-month rolling basis, the incremental credit-deposit ratio stood at around 63%, while the year-to-date CY26 incremental ratio was approximately 80%. The report also highlighted broad-based credit growth across sectors, with retail credit growth nearing 20% and industrial and services credit growth remaining strong.
NBFC earnings momentum remains strong
The brokerage said the September quarter marked the fourth consecutive quarter of earnings momentum above 20% for the NBFC sector. Most of the prominent NBFCs tracked by the report delivered a strong quarter, with HDB Financial Services (HDBFS) being the only material negative surprise.
The coverage included Bajaj Finance, SBI Cards, HDBFS and FedFina, while Chola, Shriram Finance, Mahindra Finance and L&T Finance were also discussed but were not part of the covered set. Among the broader group, asset under management (AUM) growth ranged between 16% and 37%, barring HDBFS and SBI Cards. The report said healthy AUM growth at bottom-of-the-pyramid lenders such as Shriram Finance and Cholamandalam Investment and Finance Company, along with their guidance for further acceleration, could signal improving economic activity.
BNP Paribas in a note said it prefers large private banks over non-banking financial companies (NBFCs), with HDFC Bank Ltd, ICICI Bank Ltd and Axis Bank Ltd remaining his top picks in the pecking order. Within the NBFC space, Bajaj Finance Ltd remained its top pick, while SBI Cards is the highest-conviction pick. The analyst's preference for large banks comes amid expectations of an earnings growth revival in FY27, which could emerge as a key re-rating catalyst for the sector.
BNP Paribas said, "The earnings growth revival thesis for banks remained intact." He expects large banks to see benign margin expansion or stable margins starting in the second half of FY27. Along with a favourable margin outlook, this is expected to support reasonable earnings growth momentum during the year.
Banking sector outlook
The report noted that the Reserve Bank of India (RBI) had materially neutralised the liquidity inflow arising from FCNR mobilisation of around $133 billion. The central bank conducted additional open market operations worth Rs 25,000 crore in October, while the outstanding variable rate reverse repo (VRRR) balance declined to around Rs 25,600 crore at the end of October from Rs 1.43 lakh crore at the end of September.
Despite these measures, overnight liquidity remained in surplus at around Rs 1.7 lakh crore. The analyst said durable liquidity was also expected to remain at similar levels by the end of October, with losses from capital account outflows and measures to defend the rupee likely to be offset by incremental bank credit creation. Barring large and continued outflows, liquidity is not expected to constrain credit growth. The report maintained its expectation of 13% year-on-year system credit growth in FY27, while flagging further RBI interventions and its stance on liquidity as a monitorable.
Credit growth remained steady, with system-wide credit and deposit growth at 18.2% and 16.7%, respectively, as of October 15, 2026. On a three-month rolling basis, the incremental credit-deposit ratio stood at around 63%, while the year-to-date CY26 incremental ratio was approximately 80%. The report also highlighted broad-based credit growth across sectors, with retail credit growth nearing 20% and industrial and services credit growth remaining strong.
NBFC earnings momentum remains strong
The brokerage said the September quarter marked the fourth consecutive quarter of earnings momentum above 20% for the NBFC sector. Most of the prominent NBFCs tracked by the report delivered a strong quarter, with HDB Financial Services (HDBFS) being the only material negative surprise.
The coverage included Bajaj Finance, SBI Cards, HDBFS and FedFina, while Chola, Shriram Finance, Mahindra Finance and L&T Finance were also discussed but were not part of the covered set. Among the broader group, asset under management (AUM) growth ranged between 16% and 37%, barring HDBFS and SBI Cards. The report said healthy AUM growth at bottom-of-the-pyramid lenders such as Shriram Finance and Cholamandalam Investment and Finance Company, along with their guidance for further acceleration, could signal improving economic activity.