3 bank stock picks ahead of the most challenging Q2 earnings season
MOFSL identifies ICICI Bank, HDFC Bank, and SBI as preferred stocks amidst challenging 2QFY26 with expected NIM contraction. Anticipating improvement in 2H with CRR cut benefits.
- Sep 9, 2025,
- Updated Sep 9, 2025 9:16 AM IST
In its recent sectoral note on the banking, financial services, and insurance (BFSI) sector, Motilal Oswal Financial Services Limited (MOFSL) has identified ICICI Bank, HDFC Bank, and State Bank of India (SBI) as its top stock picks, despite a challenging financial quarter ahead. The note highlights that the second quarter of FY26 is expected to be the most difficult in terms of net interest margins (NIMs) and asset quality, as banks are yet to pass the full impact of a 50 basis point repo cut.
MOFSL anticipates that NIMs will bottom out in 2QFY26, marking the trough quarter for banks. It forecasts that a gradual improvement in margins will become evident from the second half of the fiscal year, aided by the phased reduction in the cash reserve ratio (CRR) and moderation in savings and term deposit rates. This approach is expected to help in easing funding costs for banks.
Despite weak margins, higher credit costs, and muted loan growth, MOFSL remains optimistic about a gradual recovery in the banking sector's performance post-2QFY26. The firm estimates that the growth trajectory will start gaining traction from the third quarter, bolstered by the CRR cuts and declining deposit costs. Corporate commentaries also indicate easing stress, which should reduce pressure on credit costs and facilitate a positive earnings cycle.
As banks face elevated funding cost pressures, the focus has shifted towards building granular and stable deposit franchises. Strong liability profiles are considered crucial in cushioning margin stress and ensuring balance sheet resilience. Lending momentum is expected to remain modest, with system credit growth estimated at 11% for FY26, and further recovery anticipated in FY27.
In light of these sectoral challenges, MOFSL maintains its preference for ICICI Bank, HDFC Bank, and SBI. These institutions are favoured for their robust balance sheets, healthy provision coverage ratios, and relatively better growth prospects. They are expected to help mitigate downside risks to earnings in the current financial landscape.
MOFSL also forecasts that asset quality pressures in unsecured retail and microfinance institution (MFI) segments are showing signs of stabilisation. As credit costs normalise, this should support a meaningful earnings recovery in the latter half of FY26. The phased CRR cut, starting from 6th September 2025, is expected to inject INR 2.5 trillion into the banking system, further aiding banks by enabling the deployment of excess liquidity.
The report underscores that the banking sector should witness a gradual rebound in NIMs from 3Q onwards. The improvement is expected to be driven by the repricing of deposits and the benefits stemming from the phased CRR cut. This positive trajectory is likely to alleviate some of the pressures experienced during the initial quarters of FY26.
MOFSL's analysis suggests that the upcoming quarter will be pivotal in shaping the financial health of banks in the near term. The firm remains confident that with strategic measures in place, the sector will navigate through the current challenges and emerge stronger in the latter half of the fiscal year.
In its recent sectoral note on the banking, financial services, and insurance (BFSI) sector, Motilal Oswal Financial Services Limited (MOFSL) has identified ICICI Bank, HDFC Bank, and State Bank of India (SBI) as its top stock picks, despite a challenging financial quarter ahead. The note highlights that the second quarter of FY26 is expected to be the most difficult in terms of net interest margins (NIMs) and asset quality, as banks are yet to pass the full impact of a 50 basis point repo cut.
MOFSL anticipates that NIMs will bottom out in 2QFY26, marking the trough quarter for banks. It forecasts that a gradual improvement in margins will become evident from the second half of the fiscal year, aided by the phased reduction in the cash reserve ratio (CRR) and moderation in savings and term deposit rates. This approach is expected to help in easing funding costs for banks.
Despite weak margins, higher credit costs, and muted loan growth, MOFSL remains optimistic about a gradual recovery in the banking sector's performance post-2QFY26. The firm estimates that the growth trajectory will start gaining traction from the third quarter, bolstered by the CRR cuts and declining deposit costs. Corporate commentaries also indicate easing stress, which should reduce pressure on credit costs and facilitate a positive earnings cycle.
As banks face elevated funding cost pressures, the focus has shifted towards building granular and stable deposit franchises. Strong liability profiles are considered crucial in cushioning margin stress and ensuring balance sheet resilience. Lending momentum is expected to remain modest, with system credit growth estimated at 11% for FY26, and further recovery anticipated in FY27.
In light of these sectoral challenges, MOFSL maintains its preference for ICICI Bank, HDFC Bank, and SBI. These institutions are favoured for their robust balance sheets, healthy provision coverage ratios, and relatively better growth prospects. They are expected to help mitigate downside risks to earnings in the current financial landscape.
MOFSL also forecasts that asset quality pressures in unsecured retail and microfinance institution (MFI) segments are showing signs of stabilisation. As credit costs normalise, this should support a meaningful earnings recovery in the latter half of FY26. The phased CRR cut, starting from 6th September 2025, is expected to inject INR 2.5 trillion into the banking system, further aiding banks by enabling the deployment of excess liquidity.
The report underscores that the banking sector should witness a gradual rebound in NIMs from 3Q onwards. The improvement is expected to be driven by the repricing of deposits and the benefits stemming from the phased CRR cut. This positive trajectory is likely to alleviate some of the pressures experienced during the initial quarters of FY26.
MOFSL's analysis suggests that the upcoming quarter will be pivotal in shaping the financial health of banks in the near term. The firm remains confident that with strategic measures in place, the sector will navigate through the current challenges and emerge stronger in the latter half of the fiscal year.