ICICI Bank, HDFC Bank, SBI are MOFSL's top 3 banking picks

Domestic brokerage house MOFSL has identified ICICI Bank, HDFC Bank, and State Bank of India (SBI) as its top stock picks in the banking sector. MOFSL noted that NIMs remain under pressure due to continued loan repricing, but expects a rebound from the second half of FY26 onwards.

The brokerage firm highlighted that the current earnings growth within the banking sector is primarily driven by non-core treasury gains, as net interest income (NII) has significantly decelerated. MOFSL reported a 1% year-on-year decline in NII for Q1 FY26, compared to 16% growth in FY24. Despite these challenges, ICICI Bank, HDFC Bank, and SBI have shown resilience, with treasury gains acting as a buffer against declining NIMs.

According to MOFSL, treasury gains for private banks in its coverage amounted to INR 59.7 billion in Q1 FY26, compared to INR 17.5 billion in the previous quarter. Public sector banks (PSBs) reported aggregate treasury gains of INR 132.3 billion, up from INR 115.9 billion, marking a 14% increase quarter-on-quarter. Treasury gains now account for 22-40% of total other income for PSBs and 5-30% for private banks.

MOFSL expects systemic loan growth to remain modest at 11% in FY26E and recover to 12.5% in FY27E. "The recovery will likely be led by the pick-up in consumption activity, aided by reduced GST & direct tax rates, normalization in unsecured delinquencies and a reduction in borrowing costs," stated the brokerage firm. This recovery is anticipated to be a key driver of improved sector performance.

In the coming quarters, MOFSL predicts moderation in treasury gains as bond yields decline in a more calibrated manner. Despite this, the brokerage remains optimistic about future earnings recovery, projecting a 17% compound annual growth rate (CAGR) over FY26-28E.

Private banks like HDFC Bank and ICICI Bank have reported healthy treasury gains, contributing significantly to their total other income. These gains are attributed to a rally in government securities (G-sec) bonds, driven by a reduction in repo rates and supportive liquidity conditions.

Investment yields have started to soften, with MOFSL observing an 8-27 basis point decline in investment yields across its coverage PSBs. As the easing cycle progresses, banks may face reinvestment risks, particularly those with large treasury portfolios. This could affect investment income unless banks adjust their strategies by increasing book duration or shifting to floating-rate bonds.

Overall, MOFSL's top banking stock picks, ICICI Bank, HDFC Bank, and SBI, are anticipated to benefit from the predicted recovery in earnings and loan growth. As the market adjusts to changing economic conditions, these banks' solid liability profiles and strategic focus on stable deposit franchises are seen as crucial differentiators in the current environment. Furthermore, their ability to leverage treasury gains effectively positions them for a competitive advantage.