Banking sector Q4 results: NIMs likely bottomed out, business momentum improves; Axis Bank, DCB Bank among top picks

The banking sector reported mixed earnings growth during the fourth quarter of FY26, with private banks reporting relatively stronger performance and state-run lenders witnessing weaker net interest income (NII) growth and net interest margin (NIM) contraction.

NIMs stabilised across most large private banks as Savings Accounts or Term Deposits repricing benefits flowed through, offsetting yield pressures from the repo rate cut. However, corporate credit demand pressurized NIMs for PSU banks, with the State Bank of India (SBI) seeing the highest hit at 18 bps sequentially.

“The trends of net interest margins (NIM) have turned more constructive across most banks, with the full pass-through of H2FY26 savings and term deposit rate actions flowing through to cost of funds — a benefit that was broad-based across banks,” said Equirus Securities.

Management guidance across most banks points to NIMs bottoming in Q4, with stable to improving trends ahead.

The banking sector Q4 results also showed improvement in business momentum, with sequential pickup in credit and deposit growth across banks. Advances growth was healthy across most bank groups, and deposit mobilisation held up well, though deposit growth lagged advances growth, with the system LDR at 82%.

Across the banking sector, management teams have remained relatively optimistic on FY27 credit growth.

Asset quality remains comfortable

Asset quality trends were encouraging in the quarter ended March 2026, with gross non-performing assets (NPA) ratios declining across most banks and slippages moderating for lenders most exposed to MFI and unsecured retail stress, said the brokerage firm.

Credit costs trended lower in line with improving portfolio quality, with several banks using the quarter’s earnings headroom to build standard asset and contingent provision buffers, it added.

Banking Stock Picks

Equirus Securities prefers private banks in the financial sector. With credit growth consistently exceeding deposit growth for PSU banks, LCR ratios moderating sequentially and systemic credit growth seeing an uptick, the brokerage believes pricing pressure for large private banks can ease.

Additionally, Equirus Securities expects repo hikes in the second half of FY27, which would be NIM supportive for private banks. While it sees reasonable upside across all large private banks, it prefers Axis Bank within that pack. Within mid-private banks, it likes Karur Vysya Bank and DCB Bank.

Equirus Securities upgraded its ratings on IndusInd Bank shares to ‘Add’ from ‘Reduce’, with a target price of ₹950 per share. It upgraded RBL Bank to ‘Long’ from ‘Add’ with a target price of ₹390.

The brokerage firm has a ‘Long’ rating on Karur Vysya Bank with a target price ₹360, and an ‘Add’ call on AU Small Finance Bank with a target price of ₹1,145, driven by lower credit costs, improving asset quality and better operating performance.

It broadly retained its estimates and ratings for key private and public sector lenders, maintaining a ‘Long’ rating on ICICI Bank, Axis Bank, HDFC Bank, DCB Bank, Federal Bank, and Union Bank of India, while retaining an ‘Add’ rating on Bank of Baroda.

It reiterated coverage on ICICI Bank (LONG; target price: ₹1,675, upgraded from ADD), Axis Bank (LONG; TP: ₹1,620), HDFC Bank (LONG; TP: ₹1,160), DCB Bank (LONG; TP: ₹240), Federal Bank (LONG; TP: ₹330), Bank of Baroda (ADD; TP: ₹300), and Union Bank of India (LONG; TP: ₹210).

However, the brokerage lowered its earnings estimates for SBI (ADD; TP: ₹1,155), cutting FY27E NII and PAT estimates by 4% and 2%, respectively, citing yield pressure arising from a higher T-Bills-linked corporate loan mix.

It also reduced estimates for IDFC First Bank (REDUCE; TP: ₹70) by 3%, noting limited near-term visibility on return on assets (RoA) above 1%. For Canara Bank (LONG; TP: ₹155, upgraded from ADD), earnings estimates were lowered by 2%.

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