ICICI, Axis, SBI: Nomura prefers large banks over small amid tariff jitters

Nomura has turned cautious on smaller lenders, favouring large banks as it sees Indian exports present challenges for the banking sector, though its impact appears manageable in the near term. The brokerage said bigger banks are better placed with lower exposure to vulnerable sectors and stronger balance sheets, while small and mid-tier banks could see a sharper hit to earnings if credit costs rise. 

 

Its analysis indicates that a 10 per cent increase in FY26F credit costs would impact large banks by only 1-4 per cent, while small/mid-tier banks would face a higher impact of 7-12 per cent.

 

Nomura’s top picks in the current tariff scenario include ICICI Bank (Buy), State Bank of India (SBI) (Buy), and Axis Bank (Buy). 

Impact of US tariffs on banks 

Sectors facing higher US tariffs include textiles, gems and jewellery, chemicals, engineering, food processing, and marine goods. For banks, these sectors constitute 4-12 per cent of total lending. However, Nomura said the actual tariff-linked exposure is smaller, as these lending figures include non-US-related activities.

 

Given banks' limited exposure to affected sectors and potential government relief measures such as credit guarantee schemes and export support, Nomura expects the near-term impact on banks to remain manageable. It should be noted that the US is India’s largest export destination, forming 20 per cent of total exports (at $86.5bn), and 60 per cent of that has seen an increase in tariff to 50 per cent. 

Prolonged tariffs could slow credit growth and raise credit costs

Analysts suggest that the direct bank exposure to tariff-affected exporters remains modest. However, second-order effects such as supply-chain disruptions, job losses, and deferment of capital expenditure in the impacted sectors (textiles, chemicals, gems, and jewellery) could pose higher risks to the banking sector and could result in lower credit growth and higher credit costs.

MSMEs may take a harder hit

Micro, Small & Medium Enterprises (MSMEs) are more prone to take the hit as they account for 45 per cent of India’s exports. The impact on the segment will be disproportionate given their limited financial capacity to weather tariff pressures, the brokerage noted. This will lead to heightened stress in the MSME segment, which has already been experiencing rising stress (particularly in smaller ticket sizes). Weaker export orders threaten job losses in employment-intensive sectors  could also dampen local consumption and retail asset quality.  

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Geographic risk: Banks with concentrated lending face higher stress

Banks that lend heavily in Tamil Nadu, Karnataka, and the NCR (hub for textiles), Gujarat, and Maharashtra (hub for chemicals, gems, and jewellery), and southern coastal regions (hub for seafood) may experience heightened stress, according to analysts. This could lead to performance disparities, with regionally focused banks potentially underperforming compared to institutions with more diversified geographic loan portfolios.