A recent report by Systematix Institutional Equities indicates a positive outlook for the Indian banking sector, forecasting improved profitability as net interest margins (NIMs) recover. The analysis, updated on November 6, 2026, highlights diverging NIM trends among Indian banks during the second quarter of FY27.
NIM Trends and Sector Performance
During Q2 FY27, large private banks experienced an average quarter-on-quarter NIM contraction of 15 basis points. This was primarily attributed to the mobilization of FCNR(B) deposits and their deployment into lower-yielding assets. Specifically, Kotak Mahindra Bank reported a 22 basis point contraction, followed by ICICI Bank (18 bps), Axis Bank (10 bps), and HDFC Bank (8 bps).
In contrast, public sector banks demonstrated resilience, recording an average NIM expansion of 3 basis points quarter-on-quarter, largely supported by effective management of funding costs. State Bank of India (SBI) notably saw its domestic NIM improve by 11 basis points sequentially, reaching 3.11 percent.
Credit Growth and Asset Quality
The banking sector maintained healthy credit and deposit growth. Credit expansion was particularly strong, led by Bank of Maharashtra and ICICI Bank, which reported year-on-year growth of 30.2 percent and 30 percent, respectively. Deposit mobilization was also robust, with ICICI Bank and Kotak Mahindra Bank achieving 27.1 percent and 23.2 percent year-on-year growth, respectively. While FCNR(B) inflows boosted liability growth, they also contributed to increased funding costs.
Asset quality remained broadly stable, with sequential improvements in slippages and credit costs. However, banks are keeping a close watch on potential risks stemming from geopolitical disruptions, supply-chain pressures, and the El Niño phenomenon.
Future Outlook and Key Monitorables
Systematix anticipates that a 25-basis-point repo rate increase will support the repricing of assets ahead of deposits, leading to a gradual recovery in margins. The brokerage expects credit growth to moderate but remain healthy at mid-teen levels. Profitability is also projected to improve, bolstered by recovering NIMs and potential treasury gains as government security yields soften.
Key factors to monitor include retail deposit mobilization, credit costs, and the transition to the expected credit loss (ECL) framework. Despite these monitorables, strong provision buffers and capital positions are expected to cushion against additional provisioning requirements, leading Systematix to remain cautiously optimistic about the Indian banking sector's prospects.
Analyst Recommendations and Price Targets
Systematix Institutional Equities maintains a 'buy' rating on eleven lenders, with ICICI Bank, State Bank of India (SBI), and Kotak Mahindra Bank continuing to be its top three picks. The brokerage has issued the following fresh price targets:
- ICICI Bank: Rs 1,800
- State Bank of India (SBI): Rs 1,200
- Kotak Mahindra Bank: Rs 550
- Axis Bank: Rs 1,500
- HDFC Bank: Rs 890
- Bank of India: Rs 164
- Karur Vysya Bank: Rs 421
- Indian Bank: Rs 1,040
- Bank Of Maharashtra: Rs 100
- Union Bank of India: Rs 220
- Bank of Baroda (BoB): Rs 290
Additionally, Systematix holds a 'hold' rating on Federal Bank (Target Price: Rs 370) and IndusInd Bank (Target Price: Rs 1,000).