Brokerage expects Q2 softness but sees NIM recovery, stable asset quality, and long-term opportunity in select banking names
CLSA Picks 3 Banking Stocks for Strong Upside
CLSA has upgraded its view on three Indian banks, naming SBI, ICICI Bank, and Bandhan Bank as top picks in a report dated October 2. Despite projecting a subdued Q2FY26, the brokerage has issued ‘Buy’ ratings on these stocks with double-digit return potential:
- State Bank of India (SBI): Target raised to ₹1,050, offering a 21% upside from ₹867.05
- ICICI Bank: Target pegged at ₹1,700, implying a 24% gain from ₹1,365
- Bandhan Bank: Highest upside potential at 33%, with a target of ₹220 against ₹165.90
Sector View: Q2FY26 May Be the Bottom
CLSA cautioned that the second quarter could reflect a temporary trough for the banking sector due to:
- Modest loan growth of 9–10% year-on-year
- Net interest margin (NIM) compression by around 10 basis points
- Reduced treasury gains amid rising bond yields
- Continued drag from high-cost deposits
However, the brokerage also believes this quarter could mark the bottom for NIMs, with a rebound expected from Q3 onward.
NIMs Expected to Stabilize After Q2 Dip
Several structural and cyclical trends are expected to support NIM recovery in the coming quarters:
- CRR cut in November to boost margins by 5 bps
- Term deposit repricing will ease deposit costs gradually
- Pass-through from SA rate cuts (20–25 bps in June) will normalize by Q3
- Repo-linked loan resets will help large banks stabilize income
CLSA expects further support from stable credit quality and improving spreads, especially for well-capitalized banks like SBI and ICICI.
Why CLSA Favors These Three Banks
SBI
- Still trading below intrinsic value with strong fundamentals
- Likely to benefit from its market leadership, improving NIMs, and retail loan book expansion
- Reasonable valuation vs. growth potential
ICICI Bank
- Strong retail franchise, tech-led efficiency, and consistent performance
- Leading in deposit repricing and margin management
- Poised to benefit from macro stability and lending cycle rebound
Bandhan Bank
- Despite microfinance stress, Bandhan offers highest re-rating potential
- Trading at a deep discount, with 33% upside forecast
- CLSA sees improvement in asset quality and profitability over the next few quarters
Broader Sector: Mixed Ratings, Modest Growth
While optimistic on select names, CLSA remains neutral or cautious on others:
- Hold ratings maintained on Kotak Mahindra Bank, IndusInd Bank (IIB), IDFC First Bank, and RBL Bank
- Loan growth is expected to be 2–3% QoQ and 7–11% YoY for top banks
- Smaller banks may see slower growth due to weak credit demand and focus on profitability
“System credit growth is hovering around 10% YoY, with increasing shift toward corporate bonds and reduced retail momentum,” the note said.
Risk Factors to Watch
- Pace of repo rate transmission and further rate cuts, if any
- Weakness in unsecured lending, particularly credit cards and vehicle loans
- Savings deposit rate cuts impacting smaller banks more than large players
- Microfinance stress for banks like Bandhan
Despite these risks, CLSA believes the overall outlook remains constructive, particularly for large banks with strong capital positions and tech-driven growth models.
CLSA sees up to 33% upside in select Indian banking stocks, recommending Buy on SBI, ICICI Bank, and Bandhan Bank. While Q2FY26 may be weak due to margin pressure and slow credit growth, the brokerage expects NIM recovery, improving asset quality, and digital-driven efficiency to drive rerating, especially for well-managed lenders.
