The Indian banking and financial services sector is in focus after a relatively steady Q3 performance. According to the latest analysis by Axis Securities, banks delivered a 13% year-on-year credit growth in the third quarter of the 2026 fiscal year. This growth is being led by a revival across retail, secured SME, and corporate lending segments.
While deposit growth has been slightly slower, the firm expects lenders to increase momentum in unsecured segments starting from the 2027 fiscal year.
Axis Securities on Kotak Mahindra Bank: ‘Buy’
Axis Securities has assigned a target price of Rs 515 for Kotak Mahindra Bank, indicating a potential upside of 19.9% from the current market levels. The firm notes that the bank is successfully managing sectoral challenges, particularly with the easing of stress in microfinance and personal loan portfolios.
This improvement has allowed credit costs to start a downward trend which the brokerage firm expects to persist through the first quarter of the 2027 fiscal year. While some retail commercial vehicle stress remains, the bank has tightened its underwriting to protect the balance sheet.
The firm’s analysis suggests that a strategic shift toward unsecured products will likely improve overall margins.
The firm forecasts that the bank will maintain a compounded annual growth rate of approximately 17% for credit growth between the 2026 and 2028 fiscal years. This will be supported by an increasing share of higher-yielding unsecured loans. By focusing on high-return assets, the bank is positioned to deliver consistent value to its shareholders.
“The bank remains committed to expanding its unsecured portfolio to mid-teens without compromising on asset quality,” Axis Securities said.
Axis Securities on State Bank of India: ‘Buy’
State Bank of India carries a target price of Rs 1,280, with Axis Securities projecting an upside of 7.1% based on the bank’s broad-based growth. The bank’s management has upgraded its growth guidance to a range of 13% to 15%, moving up from the previous range of 12% to 14%. This optimism from the firm is based on healthy trends in retail, agriculture, and MSME segments, alongside a revival in corporate lending.
Axis Securities expects earnings to remain strong, supported by asset quality that is at its best levels in a decade. Low credit costs are aiding the bottom line, which the firm believes will allow the bank to deliver a Return on Assets (RoA) of over 1% through the 2028 fiscal year. The bank is also using technology to improve operating efficiency.
“The management remains upbeat on growth momentum sustaining, driven by Income Tax cuts, GST rate rationalisation, Trade Deals, and Budgetary push,” as noted in the brokerage.
Axis Securities on Federal Bank: ‘Buy’
Axis Securities recommends a ‘Buy’ on Federal Bank with a Target Price of Rs 320, offering a potential upside of 11.5%. The firm noted a surprising expansion in margins during the recent quarter, with margins growing by 12 basis points despite industry-wide yield compression. This was achieved through balance sheet optimization and a focus on repricing the deposit base.
The bank’s strategy involves re-balancing the asset mix toward specific mid-yielding segments to improve returns without taking excessive risk. The firm also points out that the bank is realigning its liability mix to focus more on current account deposits to lower the cost of funds.
Looking ahead the brokerage expects the bank to deliver a Return on Assets in the range of 1.3% to 1.4% by the 2028 fiscal year. This improvement is expected to be driven by risk-adjusted credit growth, a stronger fee income profile, and a stable deposit franchise.
“The bank’s focus on the medium-yielding segments is doing the bulk of the heavy lifting on NIM improvement,” Axis Securities noted.
Axis Securities on City Union Bank: ‘Buy’
City Union Bank has been assigned a target price of Rs 360 by Axis Securities, representing a potential upside of 25.5%. The firm notes that the bank’s growth engine has reached a multi-quarter high, with credit growth of 21% year-on-year in the third quarter. Management has subsequently revised its future growth guidance upward to the mid-to-high teens.
Asset quality is showing improvement with controlled levels of new bad loans and healthy recoveries. The firm expects the combination of growth and profitability to allow the bank to deliver an 18% compounded annual growth rate in total earnings through the 2028 fiscal year.
The bank is ramping up its retail secured segment while maintaining its position in gold and MSME lending. Axis Securities expects a sustainable Return on Equity in the range of 14% to 15% over the medium term for the institution.
“CUB’s growth engine has started to fire with credit growth at a multi-quarter high,” added Axis Securities
Axis Securities on Ujjivan Small Finance Bank: ‘Buy’
Axis Securities has a Target Price of Rs 74 for Ujjivan Small Finance Bank, implying an upside of 18.1%. The firm notes that growth momentum is building as loan rejection rates have moderated from 47% to approximately 30% to 35%. This indicates the bank is finding its footing in the microfinance market while following new industry rules.
A key factor for future profitability will be the normalization of credit costs, which the firm expects to be fully visible by the second half of the 2027 fiscal year. Once normalized, the bank expects credit costs to settle at a steady-state level of 1% to 1.5%.
The bank is shifting its loan mix to achieve a 50:50 balance between microfinance and secured lending by the end of the current fiscal year. Long-term plans involve increasing the secured portfolio share to 70% by the year 2030. Axis Securities notes that while this may lower yields, it will create a more stable balance sheet.
“Growth momentum continues to remain strong with the management guiding for sequentially higher disbursements,” said Axis Securities
Conclusion
The analysis by Axis Securities suggests the BFSI sector is entering a period of renewed strength with bottomed-out credit growth and improving asset quality. While banks are managing loan-to-deposit ratios and interest rate cycles, the firm expects overall earnings growth for the sector to be approximately 17% CAGR through the 2028 fiscal year. These picks reflect a preference for institutions managing risk in unsecured segments while benefiting from consumption demand.