SBI, ICICI, HDFC Bank, IIB, KMB shares: Valuation premium over global peers narrowed; targets

Jefferies on Tuesday said ICICI Bank, Axis Bank, State Bank of India (SBI), HDFC Bank and Kotak Mahindra Bank are among its top largecap banking picks. The global investment bank prefers AU Small Finance Bank (AUSFB) and IndusInd Bank Ltd (IIB) from the mid-sized banking space, as it sees up to 47 per cent upside potential for banking names under its coverage.

In its analysis of FY26 annual reports of Indian banks, Jefferies found that the sector is on a sound footing. Retail deposit franchises are diverging, while loan growth is converging, it said.

"Asset quality is at a two-decade best. Investments in Tech/ AI are taking precedence over branch expansion. ECL and wage hike costs can be offset by rate hikes. ICICI Bank and SBI have been more consistent," it said.

Valuation premium over global peers narrowed
Jefferies said ICICI Bank and SBI led with stronger growth and profitability in FY26 than peers. HDFC Bank and Axis Bank have scope to improve with better retail deposit growth and margins, it said.

"Banks have performed better than the market in 2026, but have underperformed their peers in larger regional markets. Hence, valuation premium of Indian banks over well-run global banks has narrowed. Our picks are ICICI, SBI, Axis, HDFCB, Kotak; among smaller banks we like AU Bank and IIB," Jefferies said.

Target prices for bank stocks

Jefferies sees 45 per cent upside in AU Small Finance Bank, with a target price of Rs 1,250. It has set a target of Rs 1,700 on Axis Bank, implying 40 per cent upside. SBI's target price of Rs 1,320 suggests 37 per cent upside. Jefferies sees 35 per cent upside in IndusInd Bank, with a target price of Rs 1,130. IDFC First Bank (target: Rs 96) and Bandhan Bank (target: Rs 200) are also seen gaining over 30 per cent each.

Banking sector: FY27 outlook
In FY26, Jefferies said SBI was a key surprise, which despite its large market share, lower interest rates and branch expansion, has been able to grow retail deposits by 14 per cent YoY, second only to ICICI Bank’s 15 per cent and higher than private banks like Axis Bank, HDFC Bank and Kotak Bank.

"This clearly reflects on the strength of franchise and improving productivity. In fact, while most banks have grown wholesale deposits faster than retail deposits, SBI stands out by growing wholesale deposits at much slower pace of 6 per cent," Jefferies said.

For its covered universe, Jefferies said IDFC First Bank led on Casa growth, while Kotak Mahindra Bank and ICICI Bank have lower deposit costs.

"The smaller banks tend to offer higher rates on savings deposits, hence it is difficult to carve out the part of Casa that is aggressively bid for and low-cost Casa," Jefferies said.

For FY27, Jefferies expects banking sector deposits to see a stronger 16 per cent YoY growth in deposits aided by inflow of FCNR-B deposits and core growth in deposits. This growth can normalise from FY28-29 towards 11-12 per cent, it said.

"We believe that Casa growth for banks may continue to moderate as yield-curve between savings and term deposit rates is still quite high, which will be a pressure point for deposits," it said.

Going ahead, Jefferies said banks will transition to ECL-based provisioning from FY28, leading to higher stress-loan provisions and a one-time charge.

Banks, it said, have indicated that it can lead to a 10-20 basis points (bps)  rise in credit cost, and PSU banks face a higher risk due to lower return on asset (ROA) and buffer provisions.

"PSUs will also see the next wage settlement that can lift Opex in FY28-29. On the positive side, a hike in Repo Rate, we expect 75bps, will be positive for banks, especially for PSU banks and large private banks," Jefferies said.