Hold YES Bank, Federal Bank; buy HDFC Bank, Kotak Mahindra, Axis: ICICI Securities

Brokerage ICICI Securities has retained its positive view on the banking sector. It has assigned a Buy call on HDFC Bank Ltd , Kotak Mahindra Bank and Axis Bank. Private lenders such as RBL Bank, DCB, Karur Vysya Bank and IDFC First Bank have also received buy calls from the brokerage.

YES Bank, Federal Bank and Bandhan Bank shares attracted hold calls from the brokerage.

The brokerage expects healthy NII/EPS growth aided by the FCNR (B) for FY27. NII growth in the banking sector has risen to double digits and should accelerate further. Large private banking players have relatively lagged on NII growth and asset quality, but are available at compelling valuations.

"Retain positive view on sector; MD&CEO succession clarity key Notwithstanding macro uncertainties, we retain our positive stance on the sector," said the brokerage.

Clarity on the MD & CEO re-appointment/succession at HDFC Bank/Kotak Mahindra Bank could be a re-rating event for the sector, added the brokerage.

PSB slippages at less than half of privates 

Asset quality across the banking sector remained stronger than expected despite a challenging macroeconomic environment marked by currency volatility, elevated crude prices and weather-related pressures.

Gross slippages rose marginally to around 1.2% sequentially, primarily due to seasonal weakness linked to the agricultural cycle. However, the ratio remained well below the 1.4% recorded in the year-ago period, indicating an overall improvement in credit quality.

The SMA (Special Mention Account) pool also showed encouraging trends, particularly across the microfinance (MFI) and unsecured lending segments, suggesting that potential stress in these portfolios is gradually easing.

Public sector banks (PSBs) remained relatively resilient, with slippages holding steady at around 0.7% despite the seasonal increase in credit stress. This was significantly lower than the levels seen across private lenders.

Private banks, meanwhile, recorded an improvement in slippages compared with the year-ago period. However, asset quality remained comparatively weaker, with slippages at around 1.7%, more than twice the level reported by PSBs.

Overall, the latest trends point to continued resilience in banking-sector asset quality, with lower year-on-year slippages and a shrinking SMA pool offering some comfort despite ongoing macroeconomic and seasonal headwinds.

Bank NII growth hits multi-quarter high

Net interest income (NII) growth across the banking sector accelerated sharply, reaching a multi-quarter high of 11% year-on-year, reflecting stronger core interest income during the quarter. However, net interest margin (NIM) trends varied significantly across different lender categories.

Large private-sector banks faced pressure on margins, with their NIMs declining by double digits on a sequential basis. In contrast, mid- and small-sized private banks delivered relatively better margin performance, with NIMs remaining stable to improving sequentially. Growth in gold loans and SME lending provided support to this segment.

NIM performance among public sector banks (PSBs) was also mixed, largely depending on individual banks' strategies around bulk term deposits and wholesale lending. Banks with greater exposure to these segments faced different levels of margin pressure.

Among large private lenders, Axis Bank, HDFC Bank and Kotak Mahindra Bank reported relatively subdued NII growth. NII for each of the three banks increased around 1% sequentially and 7–9% year-on-year, significantly trailing the broader private-bank universe. Mid- and small-sized private banks, meanwhile, recorded much stronger momentum, with NII growth ranging between 15% and 30% YoY. Public sector banks also saw a meaningful acceleration, with aggregate NII growth reaching around 12% YoY.

While the banking sector delivered its strongest NII growth in several quarters, the divergence in NIM performance highlights the varying impact of deposit costs, loan mix and funding strategies across lender categories.