India's banking sector continues to exhibit robust performance, marked by accelerating credit growth, stable asset quality, and strong return ratios, according to a recent report by Anand Rathi Share and Stock Brokers. The firm's analysis offers a comprehensive outlook on key trends and updated target prices for several prominent banking stocks.
Credit Growth and Deposits Bolster Sector
System-wide credit growth surged to 17.7 percent year-on-year in May 2026, marking the ninth consecutive month of acceleration. Public Sector Banks (PSBs) have notably outpaced their private counterparts, driven by increased market share in retail and MSME lending. Analysts suggest that industrial credit could emerge as a new demand driver, supported by government initiatives aimed at boosting domestic manufacturing.
Deposit growth also saw an improvement, reaching approximately 12.2 percent in May 2026. While still lagging credit growth, new FCNR deposit regulations are expected to significantly boost deposit inflows by 150-200 basis points, helping to sustain sector credit growth at 14-15 percent in FY27. The Reserve Bank of India's twin forex swap facilities for FCNR(B) deposits, which include hedging cost coverage and exemptions from CRR/SLR, are projected to attract substantial flows of $40-60 billion.
Margins and Asset Quality Remain Resilient
Despite a slight dip in system Net Interest Margins (NIMs) by about 5 basis points quarter-on-quarter in Q4FY26 due to a repo rate cut, the potential for a rate hike in calendar year 2026 points to stable to improving margins in FY27. Regional banks, particularly those with a higher share of gold loans, were an exception, showing NIM improvements.
Asset quality continues to improve, with the gross slippage ratio falling to approximately 0.97 percent in Q4FY26. PSBs maintained best-in-class performance with sub-1 percent gross slippages. While risks from factors like El Nino, crude prices, and muted white-collar job growth could lead to increased slippages in FY27 and FY28, banks are well-positioned with provisioning cover exceeding 80 percent and healthy capital ratios.
Valuations and Top Stock Picks
Anand Rathi assesses sector valuations at 1.5 times trailing consolidated book, deeming them reasonable given the projected 14-15 percent growth and strong return on equity trends. The brokerage anticipates PSBs to outperform private banks in growth and return on equity, potentially narrowing their valuation discount.
Anand Rathi's Top Banking Stock Picks and Ratings:
- SBI: Buy, Target Price: Rs 1,301
- Bank of Baroda: Buy, Target Price: Rs 329
- Union Bank of India: Buy, Target Price: Rs 208
- Indian Bank: Buy, Target Price: Rs 1,051
- Axis Bank: Buy, Target Price: Rs 1,610
- ICICI Bank: Buy, Target Price: Rs 1,716
- Federal Bank: Buy, Target Price: Rs 349
- DCB Bank: Buy, Target Price: Rs 272
- J&K Bank: Buy, Target Price: Rs 198
- HDFC Bank: Buy, Target Price: Rs 967
- Karur Vysya Bank: Buy, Target Price: Rs 376
- City Union Bank: Buy, Target Price: Rs 355
- Karnataka Bank: Buy, Target Price: Rs 330
- South Indian Bank: Buy, Target Price: Rs 59
The brokerage recommends a 'Hold' rating for Kotak Mahindra Bank (Target Price: Rs 434) and a 'Sell' rating for YES Bank (Target Price: Rs 19) and Bandhan Bank (Target Price: Rs 140).