Why SBI, HDFC Bank & ICICI Bank are MOFSL’s top 3 banking picks

MOFSL in its fresh note said it maintained preference for ICICI Bank, HDFC Bank, and State bank of India (SBI) in the banking space, even as it feels that net interest margin (NIM) for the sector will remain under pressure through 1H and into the December quarter, driven by the impact of rate cuts.

MOFSL said the three banks stand out due to their strong balance sheets, healthy PCR, and relatively better growth prospects—factors that should help mitigate downside risks to earnings.

"Banks are increasingly focusing on building granular and stable deposit franchises to cushion margin pressures and support balance sheet resilience. Strong liability profiles are becoming a key differentiator in the current environment," MOFSL said.

Despite near-term headwinds, it expects gradual improvement in NIMs, stable asset quality, and normalization of credit costs to support an earnings recovery from 2HFY26.

"In light of these sectoral headwinds, we continue to prefer ICICI Bank, HDFC Bank, and SBI," MOFSL said.

Another brokerage JM Financial also remained selective on financials. It has "preference for large banks (ICICI Bank, Axis Bank  and SBI), CUBK/DCB in mid banks, and BAF/AB Cap/PNB HF/Aadhar in NBFC/HFCs."

MOFSL said private banks are showing resilience in fresh loan yields. It believes the full impact of the 100 basis points repo rate cut is likely to reflect in NIMs during H1. In contrast, PSBs, which typically operate on a T+1 repricing model, are expected to experience NIM contraction earlier, in Q1 and Q2, MOFSL said.

"3QFY26 is likely to emerge as the key inflection point for banks, with margins stabilizing and earnings set to rebound. Easing funding costs, CRR-driven liquidity support, and credit cost normalization will collectively drive this recovery," MOFSL said.

With a cumulative rate cut of 100 bps, the spread of fresh rupee loans over the repo rate has increased to 415 bps for private lenders, the highest premium since August 2022.

For PSBs, it has increased to 238 bps. Data suggests that PSBs have opted for lower rates, whereas PVBs have strategically increased their spreads to offset the impact of rate cuts.

"The one-year MCLR for most PVBs declined 15-60bp, with ICICI Bank recording the highest reduction of 60bp. In contrast, PSBs saw a marginal increase of 5-25bp over the past year, with SBI being the highest at 25bp," MOFSL said.