Nomura sees re-rating potential in Indian Banks; Axis, ICICI, SBI top picks

Nomura on India Banks: Foreign brokerage Nomura said India’s banking sector is at the cusp of a major re-rating as the industry shifts from a phase of margin pressure to one of earnings-led momentum. 

 

In a new note dated December 2, 2025, the brokerage argued that the profitability downcycle, marked by several quarters of net interest margin (NIM) compression and elevated credit costs, is now behind the sector. 

 

Improving key operating metrics

 

With early signs of improvement in key operating metrics, Nomura believes the sector is set for a decisive inflection, supported by stronger growth, improving return ratios and inexpensive valuations.

 

 

According to the brokerage, the recently reported second-quarter FY26 (Q2FY26) performance offered clear evidence that NIMs have bottomed out. Much of the compression witnessed over the past year stemmed from the rate-cutting cycle and the higher cost of deposits. As term deposits begin to re-price on more favourable terms, Nomura expects NIMs to gradually recover, projecting an improvement of about 17 basis points (bps) over FY26-28F. Nomura has also factored in a further 25bp policy rate cut in FY26, though it said additional cuts could push out the margin recovery timeline. Even so, faster growth in higher-yielding asset segments and favourable liability dynamics should offset the impact.

 

A key pillar of the improving outlook is the moderation of stress in what has been the trickiest part of the loan book, unsecured retail and microfinance. After a year of elevated delinquencies in personal loans, credit cards and MFI portfolios, Nomura noted that the trend is now stabilising. This, in turn, is likely to lower credit costs to about 65bp over FY27-28F, compared with 72bp estimated for FY26F. The combination of better margins and declining provisioning is expected to expand sector return on assets by around 15bp over FY26-28F.

 

Growth is also beginning to show signs of revival, analysts at Nomura noted. System-wide loan growth has been subdued at around 10-11 per cent in FYTD26 as banks tightened underwriting in stressed segments and corporate capex remained patchy. Nomura, however, now expects credit growth to accelerate to 13-14 per cent by FY26F/FY27F. Policy support, led by a favourable repo-rate path, tax adjustments, and reductions in CRR and GST, is likely to aid the uptick. With banks regaining confidence in unsecured categories and broader macro sentiment improving, the firm expects the sector to clock a robust 16 per cent earnings CAGR over FY26-28F, more than double the 7 per cent pace of FY24-26F.  CATCH STOCK MARKET LIVE UPDATES TODAY

Valuations leave ample room for re-rating

 

Against this backdrop, Nomura argued that valuations leave ample room for re-rating. At 2.1x one-year forward book value, about an 8 per cent discount to the long-term average, the sector trades at inexpensive levels despite a much stronger profitability and growth outlook. The brokerage believes improving return on assets (RoAs), accelerating credit momentum and visibility on earnings compounding create a compelling case for a valuation catch-up.

 

Nomura’s pecking order tilts towards large banks with solid return profiles, cleaner asset quality and strong liability franchises. Within private-sector lenders, the brokerage prefers Axis Bank and ICICI Bank. Axis is seen benefiting from improving loan growth, better asset-quality trends and attractive valuations, while ICICI is highlighted as a sector leader with consistent compounding across metrics including deposit growth, asset quality, RoA and RoE.

 

HDFC Bank remains a ‘Buy’, but Nomura says the lender must demonstrate stronger deposit mobilisation to sustain a meaningful revival in loan growth, especially with its credit–deposit ratio near 98 per cent.

 

Among public-sector banks, the brokerage favours State Bank of India over Bank of Baroda, citing SBI’s superior core-profitability profile. In the mid-tier segment, IndusInd Bank is named as a potential turnaround play. Nomura remains Neutral on AU Small Finance Bank, where the valuation at 3x FY27F BV already captures much of the upside, and on Bandhan Bank, where asset-quality worries offset valuation comfort.

 

That said, Nomura ranks its preferences as Axis Bank first, followed by ICICI Bank and SBI. Key risks, analysts suggest, include subdued loan growth, faster-than-expected rate cuts and any fresh deterioration in asset quality. 

Disclaimer: Target price and stock/sector outlook has been suggested by Nomura. Views expressed are their own.