The leading brokerage Motilal Oswal has placed its bets on four heavyweight banking stocks that it believes are positioned to weather the storm and deliver returns. In its latest sector note, the brokerage outlines the changing landscape in the banking sector and names its top picks in the list of banking sector stocks.
Let’s take a look at what is happening in the banking space and know why these four lenders are the top pick in the brokerage’s list.
Motilal Oswal on Financials: These 4 bank stocks are in its top list
Motilal Oswal has picked four leading bank stocks. This includes ICICI Bank, HDFC Bank, State Bank of India (SBI), and AU Small Finance Bank.
Despite slowing credit growth and pressure on margins, the brokerage believes these banks are well-positioned to perform
Motilal Oswal on Financials: Lending rates are falling – Here is what it means
According to the brokerage report, the Weighted Average Lending Rate (WALR) on fresh loans declined by 9 basis points (bps) month-on-month (MoM) in April 2025, continuing the trend from March, when it had dropped by 5 bps. Public Sector Banks (PSBs) saw a 20 bps drop, while Private Banks (PVBs) saw a sharper fall of 24 bps.
This means banks are lowering the interest rates on new loans. This is often seen as a sign of increased competition or central bank rate cuts. In this case, it is the latter, noted the brokerage in its report.
“Following two successive 25bp rate cuts, fresh rupee loan over repo premium increased to 4.08% for PVBs and 2.46% for PSBs, the highest premium since August 2022,” as per the brokerage report.
Motilal Oswal on Financials: Credit growth has slowed – But there is a reason
System-wide credit growth has now slowed to around 9.8% as of May 16, 2025, the brokerage noted. According to Motilal Oswal, banks are being cautious. “Banks are currently following a conservative path with a keen focus on asset quality versus disbursement velocity,” it said.
Retail loans are now being given mainly to high-credit-score, well-documented profiles. Corporate lending is also expected to remain subdued in FY26, as banks avoid risky borrowers and focus on managing existing portfolios, the brokerage report noted.
Motilal Oswal on Financials: Deposit rates flat, competition surging up
While lending rates are falling, deposit rates have not come down by much. The Weighted Average Term Deposit Rate (WATDR) for the system was flat at 7.01% during January to April 2025, indicating intense competition for attracting deposits. Deposit growth has remained stagnant at 10-12% over the last few years, which has led to liquidity stress and a high Credit-Deposit (CD) ratio.
Motilal Oswal on Financials: NIM pressure likely in the first half of FY 26
With lending rates falling faster than deposit rates, Net Interest Margins (NIMs) , which is the difference between what banks earn on loans and pay on deposits, are likely to come under pressure.
As per the brokerage report, “We estimate that NIMs will experience a negative bias in 1HFY26,” but things may improve later. The brokerage adds that “lagged pass-through of deposit rate reductions is expected to slightly improve NIMs in 2HFY26.”
So while the near term may see margin compression, the second half of the financial year could bring relief as banks re-price their deposits at lower rates.