MOFSL recommends these two top banking stocks for your portfolio; details

India’s banking sector is witnessing a turning point as public sector banks (PSBs) reverse a decade-long slide in market share, even as overall credit growth shows signs of cooling. After clocking a robust 15.6 per cent CAGR during FY22–24, system loan growth has slowed to 9.8 per cent year-on-year as of July 2025, driven by tighter liquidity, regulatory curbs on unsecured lending, and muted corporate demand.

 

Retail lending, which had been the mainstay of growth for private banks, has decelerated sharply across both secured and unsecured categories. Mortgage growth eased to 9 per cent and card loans to 8.5 per cent Y-o-Y, down from double-digit expansion a year earlier. Wholesale credit demand also remained soft, weighing on system-level momentum. However, the sector is poised for a cyclical recovery in H2FY26, aided by festive season demand, improving liquidity, and lower interest rates.

 

While unsecured retail stress remains elevated, delinquencies appear to have plateaued. The adoption of risk-based pricing and easing credit costs should help support recovery in unsecured loans and microfinance lending, both of which saw a sharp slowdown in FY25. On the liability side, pressure on margins persists as funding costs adjust, though a gradual easing is expected to restore profitability from the second half of FY26.

 

PSBs, long plagued by asset quality concerns and slower modernisation, delivered 12 per cent growth in FY25 – outpacing private peers for the first time in fifteen years. Stronger capitalisation, improved profitability, and balance sheet repair underpinned this turnaround. Their market share ticked up by ~40 basis points in FY25, marking the first gain in over a decade. That said, structural challenges remain: branch additions, tech investments, and staffing have lagged private banks, limiting the scope for steep growth acceleration.  ALSO READ | Not HDFC or YES Bank: These 3 bank stocks can rally up to 16%, say charts 

Looking ahead, system credit growth is projected to sustain at around 11-12.5 per cent over FY26-27. PSBs are likely to see stable, though moderate, loan growth of 10-13 per cent CAGR through FY28, reflecting stability rather than aggressive expansion. Meanwhile, private banks are likely to deliver slightly higher growth but face constraints from elevated credit-deposit ratios. Sector earnings are expected to improve meaningfully by FY27, marking an end to the current phase of deceleration.

 

The Indian banking sector thus enters FY26 on a more balanced footing, with PSBs regaining relevance and private banks recalibrating strategies amid margin pressures. The medium-term opportunity remains underpinned by improving credit demand, normalisation in asset quality, and gradual margin recovery.

 

HDFC Bank - TP: 2300

 

HDFC Bank is well-positioned to deliver a strong earnings rebound, supported by improving loan growth across Commercial & Rural Banking (CRB), SME, and retail segments. With normalisation of the CD ratio and a granular liability profile, the bank is poised to accelerate credit growth – guided to be in line with the system in FY26 and ahead in FY27. Robust asset quality (GNPA/NNPA at 1.4 per cent/0.5 per cent in 1QFY26) and provisioning buffers (INR366b) provide comfort, while margin recovery is expected as high-cost borrowings are replaced by deposits. We estimate HDFCB to deliver FY27E RoA/RoE of 1.9 per cent/14.9 per cent.

 

ICICI Bank - TP: 1670

 

ICICI Bank posted 15.5 per cent Y-o-Y PAT growth in 1QFY26, aided by stable NIMs at 4.34 per cent, strong treasury gains (₹12.4b), & controlled opex. This reflects its consistent earnings delivery despite sector-wide NIM pressure and rising credit costs. Advances grew 11.5 per cent Y-o-Y and 1.7 per cent Q-o-Q, driven by strong momentum in Business Banking (+29.7 per cent Y-o-Y, +3.7 per cent Q-o-Q), which now forms 20 per cent of the book. Deposits grew 12.8 per cent Y-o-Y, while CASA mix stood at 41.2 per cent. Average CASA ratio improved 30bp Q-o-Q to 38.7 per cent. ICICI’s stable GNPA/NNPA at 1.67 per cent/0.41 per cent, ₹131b contingency buffer, & 16.3 per cent CET-1 ratio highlight its robust balance sheet. Continued tech investments and confident Personal Loan/Credit Card outlook position the bank for FY27E RoA/RoE of 2.3 per cent/17.3 per cent.

 

(Disclaimer: This article is by Motilal Oswal Financial Services Research desk. Views expressed are its own.)