The banking sector stocks are back in focus after Jefferies said widening gaps in deposit and fee productivity have already begun separating stronger lenders from weaker ones. In its Navigator 3.25 report dated October 21, the brokerage said bank margins are likely to recover from the December 2025 quarter and stay firm through FY28.
Among listed lenders, Bandhan Bank carried the largest potential gain of 34 percent, followed by HDFC Bank, ICICI Bank and Axis Bank. The brokerage said deposit strength and fee income will decide which lenders see a rerating in FY26.
“Improved core performance and low valuation are re-rating catalysts,” the brokerage noted.
Jefferies on the banking sector: Deposit and fee gaps widen
Jefferies stated FY25 annual reports showed a clear divide between banks that collect low-cost deposits and those that depend on expensive term money.
Private lenders with deeper retail franchises were already translating that advantage into stronger profitability.
HDFC Bank, SBI and IDFC First Bank recorded the highest retail deposits per branch, while Axis Bank and several PSUs lagged.
Private banks earned fee income equal to about 1.4–1.9 percent of assets, compared with 0.2–0.5 percent for state-run peers.
Jefferies said this gap was likely to persist, keeping returns and valuations uneven across the system.
Credit costs steady; margins to improve
Loan losses across the brokerage’s coverage universe remained at about 0.5 percent of loans in FY25. Slippages rose 16 percent year-on-year, mainly from unsecured retail credit, but overall asset quality improved as system GNPA fell to 1.9 percent from 2.3 percent. Credit costs are expected to rise slightly to 0.7 percent in FY26 before stabilising.
Margins should start improving from December 2025, helping banks post around 11 percent annual growth in interest income and profit through FY28, as per the brokerage report.
Jefferies on HDFC Bank: ‘Buy’
Jefferies said HDFC Bank continued to lead on deposit strength, supported by a broad branch network and steady retail inflows.
The brokerage valued the stock at 2.1 times book and set a target price of Rs 1,240, indicating an upside of about 24 percent.
Its projected return on equity (ROE) stands at 14 percent and return on assets (ROA) at 1.7 percent for FY27. Fee income is expected to rise as merger synergies build out.
Jefferies on ICICI Bank: ‘Buy’
ICICI Bank’s asset quality stayed firm despite faster SME growth.
Jefferies said its diversified loan mix and low credit costs keep earnings consistent.
It valued the stock at 2.3 times book with a target of Rs 1,760, indicating a potential gain of about 23 percent. ROE was projected at 17 percent and ROA at 2.2 percent for FY27.
Jefferies on Axis Bank: ‘Buy’
Jefferies titled its Axis note “Retail performance drags; improvement key to rerating.” It said Axis needs to strengthen its retail deposit base and fee income to close the gap with larger peers. The stock was valued at 1.5 times book with a target of Rs 1,430, suggesting about 19 percent upside. ROE was estimated at 14 percent and ROA at 1.6 percent for FY27.
Jefferies on Kotak Mahindra Bank: ‘Buy’
Kotak remained among the cleanest banks on asset quality and capital position.
Jefferies valued it at 1.6 times book and set a target of Rs 2,550, indicating potential gains of about 16 percent.
ROE was estimated at 13 percent and ROA at 2.1 percent for FY27.
The brokerage said growing deposit traction and focus on affluent clients should lift fee income.
Jefferies on IndusInd Bank: ‘Buy’
Jefferies said IndusInd’s turnaround was progressing, with steady improvement in loan growth and asset quality.
The stock was valued at 0.9 times book and carried a target of Rs 920, implying upside of about 23 percent. ROE and ROA for FY27 were estimated at 6 percent and 0.7 percent.
Jefferies on IDFC First Bank: ‘Buy’
IDFC First’s deposit base has grown rapidly, bringing down funding costs. Jefferies valued the stock at 1.2 times book with a target price of Rs 85, indicating gains of around 18 percent.
The brokerage estimates 9 percent ROE and 0.9 percent ROA for FY27.
Jefferies on Bandhan Bank: ‘Buy’
Bandhan Bank had the highest rerating potential in Jefferies’ coverage.
The brokerage said asset quality had stabilised, while retail deposit and fee growth were showing clear improvement.
It valued the stock at 0.9 times book and set a target of Rs 215, pointing to a possible gain of about 34 percent. ROE estimates as per Jefferies stood at 12 percent and ROA at 1.5 percent for FY27.
Jefferies on AU Small Finance Bank: ‘Buy’
AU SFB’s steady growth through new branches and digital expansion keeps returns high, Jefferies said. It valued the stock at 2.5 times book and gave a target of Rs 940, indicating gains close to 19 percent. The brokerage projects the ROE at 15 percent and ROA at 1.7 percent for FY27.
Jefferies on State Bank of India: ‘Buy’
SBI remained Jefferies’ top PSU pick, supported by strong deposits, capital adequacy and stable subsidiaries. The stock was valued at 1.2 times book with a target of Rs 970, suggesting gains of about 9 percent.
It expects the ROE and ROA for FY27 stood at 15 percent and 1.1 percent.
Jefferies on Bank of Baroda: ‘Hold’
Jefferies maintained a Hold rating on Bank of Baroda with a target of Rs 255, slightly below its market level of Rs 265. It valued the bank at 0.9 times book and projected ROE of 14 percent and ROA of 1.1 percent for FY27. Slower growth and international exposure were cited as reasons for limited rerating scope.
Jefferies on why rerating will stay selective
Jefferies said the market is rewarding lenders that fund growth cheaply and earn more per customer through fees.
Private banks have an edge because they combine stronger deposit bases with better digital reach. System credit is expected to grow about 12 percent annually during FY25–28, led by retail and small-business lending, while deposits may rise around 10 percent a year. Fee income for covered banks is forecast to rise from Rs 1.49 lakh crore in FY25 to Rs 2.19 lakh crore by FY28, as per Jefferies.
Jefferies said valuations for Indian banks were still slightly below long-term averages and that improving margins and fee strength could drive selective rerating, led by Axis, HDFC and ICICI Bank.
