CLSA bullish on 3 bank stocks, sees up to 33% upside; here’s why

CLSA has put three Indian lenders firmly in its ‘Buy’ recommendation in a note dated October 2, setting target prices that imply double-digit upside from current levels. 

CLSA has pegged SBI’s target price at Rs 1,050, suggesting a 21 per cent upside from Rs 867.05. It sees ICICI Bank advancing to Rs 1,700, a potential 24 per cent gain from Rs 1,365, while Bandhan Bank offers the highest upside of 33 per cent, with a target of Rs 220 against its current price of Rs 165.90.

CLSA expects a subdued 2QFY26 for Indian banks, citing modest loan growth of around 9-10 per cent and net interest margin (NIM) compression of about 10 basis points for most banks. The impact of the June repo rate cut will be seen in the second quarter, partially offset by reductions in savings account and term deposit rates.

Deposit growth is steady, with some banks trimming wholesale deposits due to weak credit demand. Treasury gains that were strong in the first quarter are expected to decline as bond yields rise. Asset quality in unsecured lending is showing marginal improvement, though pressure remains in credit cards and commercial vehicle loans.

CLSA is cautious on loan growth but expects NIM to start improving from the third quarter, aided by CRR cuts and term deposit repricing. The brokerage prefers SBI and ICICI Bank among large banks and Bandhan Bank in the midcap segment, while maintaining Hold ratings on Kotak, IIB, IDFCB, and RBL.

NIM is forecast to decline by around 10 basis points sequentially in 2QFY26 for most banks, which could be the bottom unless the RBI cuts rates further. Bandhan and Axis may see greater NIM compression, while RBL could see flat or marginally improved NIM.

Key factors influencing NIM compression include the timing and quantum of rate cut pass-through, savings account rate cuts, and the share of repo-linked loans. Major banks reduced SA rates by 20-25 basis points in June, with the full impact to be seen in the second quarter. Smaller banks took larger SA rate cuts in select categories.

The 100bps CRR cut in November is expected to aid NIMs by 5 basis points, with further support from term deposit repricing lowering deposit costs over subsequent quarters. CLSA believes NIM will likely bottom in 2Q unless there are more rate cuts.

Loan growth remains modest, with system credit growth at about 10 per cent year-on-year as of mid-September, driven by a shift towards corporate bonds and subdued retail loan demand. Top private and public sector banks are expected to post 2-3 per cent quarter-on-quarter and 7-11 per cent year-on-year loan growth, while Bank of Baroda could see around 5 per cent sequential growth. Bandhan Bank is forecast to grow loans by only 4 per centyear-on-year due to weak microfinance demand, Federal Bank is focusing on profitability with 7 per cent estimated growth, and IDFCB continues to grow at a faster pace.