HDFC Bank, SBI, ICICI Bank, Kotak Bank, Axis Bank, BoB: Check fresh price targets for banking stocks

Net interest margin (NIMs) trends among Indian banks diverged in the second quarter of FY27, with large private banks reporting an average quarter-on-quarter contraction of 15 basis points, while public sector banks recorded an average expansion of 3 basis points, according to a report by Systematix Institutional Equities.

The report said credit and deposit growth remained healthy and asset quality was broadly stable. It expects profitability to improve as margins recover and government security yields soften, although retail deposit mobilisation, credit costs and the transition to the expected credit loss framework remain key factors to monitor.

The margin contraction at large private banks was mainly driven by the mobilisation of FCNR(B) deposits and their deployment in lower-yielding assets. KMB reported a quarter-on-quarter contraction of 22 basis points in its net interest margin, followed by ICICI Bank Ltd at 18 basis points, Axis Bank Ltd at 10 basis points and HDFC Bank Ltd at 8 basis points.

In contrast, public sector banks reported an average quarter-on-quarter margin expansion of 3 basis points, supported largely by better management of funding costs. State Bank of India's domestic net interest margin improved by 11 basis points sequentially to 3.11 per cent.

Systematix said the 25-basis-point repo rate increase would support the repricing of assets ahead of deposits. Management commentary indicated a gradual recovery in margins. Credit growth remained healthy across the banking sector, led by Bank of Maharashtra and ICICI Bank, which reported year-on-year growth of 30.2 per cent and 30 per cent, respectively.

Deposit mobilisation was led by ICICI Bank and Kotak Mahindra Bank Ltd, with year-on-year (YoY) growth of 27.1 per cent and 23.2 per cent, respectively. While FCNR(B) inflows supported liability growth, they also increased funding costs and weighed on margins during the quarter.

Asset quality remained broadly stable, with sequential improvements in slippages and credit costs. However, banks remained watchful of potential stress from geopolitical disruptions, supply-chain pressures and El Niño.

The transition to the expected credit loss framework remains a key monitorable, the report said. However, strong provision buffers and capital positions are expected to provide some cushion against additional provisioning requirements. Systematix Institutional Equities expects credit growth to moderate from current levels but remain healthy at around the mid-teens.

It also expects profitability to improve, supported by a recovery in net interest margins and potentially better treasury gains as government security yields soften. The brokerage remains cautiously optimistic about the banking sector, citing adequate capitalisation and healthy growth prospects. Retail deposit mobilisation, credit costs and the expected credit loss transition remain key monitorables.

From the banking spaces, Systematix has a 'hold' rating on two stocks including Federal Bank (Target Price: 370) and IndusInd Bank (Target Price: 1,000). The brokerage has a 'buy' rating on 11 lenders. ICICI Bank, SBIN and Kotak Mahindra Bank continue to be its top three picks.

It has suggested to buy ICICI Bank (Target Price: Rs 1,800), SBI ((Target Price: Rs 1,200), Kotak Mahindra Bank (Target Price: Rs 550), Bank of India (Target Price: Rs 164), Axis Bank (Target Price: Rs 1,500), HDFC Bank (Target Price: Rs 890), Karur Vysya Bank (Target Price: Rs 421), Indian Bank (Target Price: Rs 1,040), Bank Of Maharashtra (Target Price: Rs 100), Union Bank of India (Target Price: Rs 220) and Bank of Baroda (Target Price: Rs 290).