The brokerage firm Motilal Oswal has revealed its top picks amongst banking sector stocks. As per the brokerage report, these banks have been selected based on their balance sheets, growth prospects, and resilience in the face of margin and credit pressures.
According to Motilal Oswal, after the 100 bps repo cut in CY25, system yields have eased by roughly 50 bps. However, some large private banks reported a limited decline.
The brokerage added, “Tactical repricing has helped support NIMs; however, margin pressure is expected to continue through 2Q, with recovery anticipated from 3Q, aided by CRR cuts and lower deposit costs.”.
Motilal Oswal’s top financial picks: ICICI Bank, HDFC Bank, and SBI
Motilal Oswal continues to prefer ICICI Bank, HDFC Bank, and SBI in the current environment. These banks are highlighted for their strong balance sheets, healthy provisions coverage ratio (PCR), and relatively better growth prospects.
The brokerage report stated, “In light of these sectoral headwinds, we continue to prefer ICICI Bank, HDFC Bank, and SBI. These banks stand out due to their strong balance sheets, healthy PCR, and relatively better growth prospects, which are expected to help mitigate downside risks to earnings.”
Let’s take a look at the what Motilal Oswal believes are the key drivers in this sector –
Motilal Oswal on Financials – Banks: Margin pressures and lending rates
Banks are currently navigating a tricky environment. Following a 100bp repo cut in CY25, system yields have eased by around 50bp. However, some large private banks reported only limited declines.
The Weighted Average Lending Rate (WALR) on fresh loans declined 45bp over the past six months. The private banks experienced a sharper drop of 58bp, while public sector banks saw a 41bp reduction.
Furthermore, WALR on outstanding loans for the system eased 6bp month-on-month, reflecting a slower pace of decline for PSBs compared to PVBs, highlighting faster loan repricing by private banks earlier in the year.
On the deposit side, the Weighted Average Term Deposit Rate (WATDR) for the system dropped 8bp month-on-month to 6.99%. Both private and public sector banks experienced similar declines.
As per the brokerage house report, deposit costs are expected to moderate gradually as term deposits reprice over the second half of FY26, providing support for margin recovery.
Motilal Oswal on Financials – Bank earnings may trough in Q2FY26
According to the report, Q2FY26 is likely to be the most challenging quarter for banks.
“Q2FY26 is likely to be the trough quarter for banks, marked by sharper NIM contraction, muted loan growth, and persistent stress in segments like unsecured and CV loans,” added the report, Elevated credit costs are expected to weigh on earnings, but a recovery is anticipated from Q3FY26, supported by CRR cuts and a pick-up in demand led by reductions in GST and income tax rates.
Furthermore, Motilal Oswal pointed out, “Notably, spreads remain well above CY24 averages: PVB spreads stand at 482bp vs the repo (vs 426bp in CY24), indicating potential for a 50-55bp decline, while PSB spreads stand at 323bp (vs 271bp in CY24), suggesting a 40-50bp contraction ahead.”
Motilal Oswal on Financials – Bank funding costs and balance sheet resilience
Banks are prioritising stable and granular deposit franchises to manage elevated funding costs.
“Strong liability profiles are proving crucial in cushioning margin stress and ensuring balance sheet resilience, particularly as loan growth remains muted,” the brokerage report noted.
From Q3 onwards, “NIMs are expected to benefit from deposit repricing and phased CRR cuts, while asset quality pressures in unsecured retail and MFI segments show early signs of stabilisation,” they added.