The Indian banking sector has demonstrated remarkable resilience in the current year, clocking robust double-digit growth amidst a backdrop of stock market fluctuations and interest rate reductions by the Reserve Bank of India (RBI). Despite the pressure on net interest margins (NIMs) from the rate cuts, banking indices and key stocks have significantly outperformed the broader market.
Strong Market Performance and Growth Outlook
The Nifty Bank index has surged by an impressive 16% so far this year, comfortably outpacing the 10% rise in the benchmark Nifty 50. This bullish trend is reflected in individual stock performances, with public and private sector banks alike posting substantial gains. Canara Bank, IDFC First Bank, Federal Bank, and the State Bank of India (SBI) have witnessed rallies between 25% and 50% in 2025.
Market experts maintain a positive stance on the sector, anticipating healthy earnings growth and a stabilisation in margins. A key factor supporting this optimism is the diminishing likelihood of further repo rate cuts by the RBI in the near term. Analysts believe the market has already accounted for the rate cut cycle, allowing investor focus to shift back to fundamental growth drivers.
Brokerage Views and Q3FY26 Projections
Leading brokerage firm ICICI Securities has highlighted specific banks expected to report relatively stronger results for the third quarter of the fiscal year 2025-26 (Q3FY26). Their list includes SBI, Kotak Mahindra Bank, City Union Bank, and Karur Vysya Bank.
The brokerage provided detailed loan growth estimates, stating, "We estimate sustained strong (more than 15% year-on-year) loan growth from IDFC First Bank, Kotak Mahindra Bank, City Union Bank, Karur Vysya Bank, DCB Bank, and RBL Bank. Meanwhile, SBI should deliver nearly 13% YoY growth." On a sequential basis, they see healthy acceleration at Axis Bank and Federal Bank.
However, the report also notes exceptions. IndusInd Bank is projected to be the only bank under their coverage that might experience a year-on-year de-growth in loans. Furthermore, Bandhan Bank's loan growth is expected to be impacted by a large-scale sale of assets to reconstruction companies (ARCs).
Expert Commentary and Stock Recommendations
Ajit Mishra, Senior Vice President of Research at Religare Broking, echoed the sentiment that the phase of potential rate cuts is largely over. "The market is discounting the possibility of further rate cuts, which is now largely behind us. As a result, margins are expected to stabilise," Mishra said. He also expects credit offtake to improve in the coming quarters, citing encouraging growth projections from private banking majors and the resolution of past challenges in areas like microfinance.
Mishra pointed to renewed foreign investment interest in Indian banks like IDBI Bank and RBL Bank as a sign of sustained global confidence. Regarding specific stocks, he is positive on Kotak Mahindra Bank and HDFC Bank. He also views public sector banks (PSBs) favourably as a basket, given their strengthened balance sheets. "The leaders—such as SBI, Bank of Baroda and Canara Bank—have the potential to continue performing well, broadly in line with what we expect from private banks," he added.
ICICI Securities, while noting that NIM recovery has been delayed due to the recent rate cut, believes net interest income (NII) growth has bottomed out. They project muted profit-after-tax (PAT) growth (less than 5% YoY) for the banking sector in FY26, but expect a rebound to double digits in FY27 as margins and credit growth improve.
The brokerage's preferred picks include Kotak Mahindra Bank, Axis Bank, and HDFC Bank among large private lenders. Among smaller private banks, they favour RBL Bank, Karur Vysya Bank, City Union Bank, and DCB Bank. For PSU banks, they see strong risk-reward in SBI, which is expected to be a key beneficiary of reforms and may not be part of any potential consolidation among state-owned banks.
