HDFC Bank, ICICI Bank, SBI, AU SFB shares: Top banking stock picks

MOFSL in its latest note on banking sector said mid-sized players are set to outperform large-sized banks in terms of earnings going ahead, supported by improving margins, easing stress in unsecured portfolios, and relatively stable credit costs. ICICI Bank Ltd is MOFSL's top bank stock pick, followed by HDFC Bank Ltd, State Bank of India (SBI) and AU Small Finance Bank (AFB). 

For now consensus estimates indicate a rebound in banking earnings in FY27, with expected growth of 13 per cent YoY to Rs 3.9 lakh crore, supported by 14 per cent YoY growth in net interest income (NII). MOFSL expects private banks to outperform PSU banks, with private bank earnings projected to grow 21 per cent in FY27E against 4.2 per cent growth for PSU banks. This is similar to the views earlier shared by Antique Stock Broking.

MOFSL said FY27 is likely to be a transition year, wherein PSU banks may witness further earnings moderation after nearly three years of relative outperformance.  

MOFSL said the steepest earnings downgrades in the previous earnings cycle  were witnessed in mid-sized private banks, largely due to their relatively higher exposure to unsecured retail and MFI segments. 

That said, with the unsecured stress cycle now showing signs of improvement, select banks have witnessed earnings upgrades over the last three months, it said. 

"Bandhan Bank, IndusInd Bank, and AU Bank have seen earnings upgrades of 3 per cent, 10-16 per cent, and 1 per cent, respectively. In contrast, IDFC First Bank and RBL Bank have witnessed earnings downgrades of 14 per cent and 21-27 per cent, respectively. 

Among larger private banks, MOFSL said earnings estimates were largely remained stable, with limited downward revisions. For instance, ICICI Bank, HDFC Bank, Axis Bank Ltd, and Kotak Mahindra Bank Ltd have broadly seen flat earnings estimates over the period. 

Among PSU banks, MOFSL said its earnings estimates for Punjab National Bank (PNB), Indian Bank, and Union Bank remain 2-27 per cent higher than consensus, while its estimates are 3 per cent below consensus on SBI for FY28E. 

"At an aggregate PSU bank level, our earnings estimates are 1.5 per cent ahead of consensus. Overall, for the banking sector, our FY27-28 earnings estimates remain broadly 1-2 per cent higher than Street expectations," it said.