India’s banking sector is in focus. Bank stocks haves seen strong gains in today’s session. The global brokerage house Nomura pointed out that the improvement in system credit growth and the acceleration has been funded by banks drawing down liquidity buffers. As these buffers moderate, they expect that sustaining credit growth will require deposit growth to pick up. Even so, the brokerage has identified a set of banks it believes are better positioned to navigate the evolving environment.
Nomura has assigned ‘Buy’ ratings to names like HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and IDFC First Bank, with expected upside potential going up to 27%, according to the brokerage report.
Nomura’s top banking bets: The top picks
As per the brokerage report, Kotak Mahindra Bank emerges as the top pick, followed by Axis Bank and ICICI Bank.
“Kotak Mahindra Bank stands out most clearly on both counts,” the brokerage said, referring to its liquidity position and strong deposit base.
Kotak Mahindra Bank’s target price is placed at Rs 445, indicating a 21.3% upside. The brokerage has given a ‘Buy’ rating to Axis Bank target with a target of Rs 1,500, suggesting a 24.8% upside.
ICICI Bank has a target of Rs 1,535 with a potential upside of 23.3%.
Apart from this top picks, Nomura has set a target price of Rs 940 for HDFC Bank, implying around 20% upside. IDFC First Bank is seen reaching Rs 80, offering the highest upside of about 27%.
Let’s take a look at the key reasons behind this call and the rationale behind it –
The bigger concern: Growth built on borrowed strength
According to Nomura’s report, “The improvement in system credit growth from 10% to 14.9% year-on-year since mid-2025 has been built on borrowed time.”
In simple terms, banks have been lending more, but not because deposits are growing strongly.
Instead, much of this growth has been supported by using existing liquidity buffers. “The acceleration has been funded by banks drawing down liquidity buffers – not by strong deposit mobilisation,” the report noted.
This has pushed the credit-deposit ratio which measures how much of deposits are used for lending to around 82%, compared to a long-term average of 75%.
Why deposits matter more than ever
Nomura highlighted that sustaining loan growth will depend heavily on deposit growth catching up. Currently, deposit growth stands at about 12.5% year-on-year, which is still lagging behind credit growth.
The brokerage highlighted this with a broader economic lens. “Deposit growth is a function of monetary creation, not bank-level competitive intensity,” it said.
For deposits to grow meaningfully, factors like higher government spending and stronger foreign exchange inflows are needed. However, both are currently below required levels, as per the brokerage report.
Rising costs despite rate cuts
One of the more factor highlighted by Nomura is that funding costs are rising even though interest rates have been cut.
“Funding costs are rising despite policy easing,” the report said. This is happening because the gap between credit growth and deposit growth continues to put pressure on banks to raise money at higher costs.
For instance, yields on certificates of deposit, a short-term borrowing tool used by banks have risen to around 7.1% from about 6% in mid-2025. At the same time, the share of low-cost deposits, known as CASA (Current Account Savings Account), has declined over the years.
Because of this, the brokerage has lowered its Net Interest Margin (NIM) estimates. “We revise NIM estimates lower across the sector,” Nomura noted, adding that the expected recovery in margins could be delayed.
What makes certain banks stand out
Nomura prefers banks that have stronger deposit franchises and better liquidity buffers. “We favor banks that score well on two dimensions: residual LCR headroom and liability franchise quality,” the brokerage said.
Kotak Mahindra Bank, for instance, has a Liquidity Coverage Ratio of 135% and a strong share of retail deposits.
Axis Bank, on the other hand, is expected to deliver strong earnings growth, while ICICI Bank continues to be seen as a steady compounder with a strong profitability profile.
Conclusion
Overall, the report noted that the banking sector is entering a more challenging phase. Growth is still there, but the drivers behind it are shifting. “Liquidity-funded growth has a ceiling,” Nomura cautioned.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.