The banking sector delivered robust earnings in the second quarter of FY26, reinforcing optimism for a stronger performance in H2FY26. Results across banks, NBFCs and diversified financials improved, confirming that the soft patch witnessed in the first half of the fiscal is now firmly behind the sector.
Banks delivered an 11% YoY and 4% QoQ credit growth, with PSU banks outperforming private peers, and Retail and secured SME segments driving momentum. Deposit growth, although trailing credit, continues to strengthen through healthier CASA accretion and disciplined mix management, helping banks defend margins more effectively than expected.
According to Axis Securities, net interest margins (NIMs) have bottomed out and already begun recovering ahead of schedule, aided by improving CoF trends and prudent liability management.
“Earnings came in meaningfully better than anticipated, supported by strong fee income, controlled Opex, and meaningfully lower slippages, especially in the unsecured portfolios where stress has started to ease,” said the brokerage firm.
Banking Sector Outlook
For banks, Axis Securities builds in a 14% CAGR credit growth over FY26–28E, alongside improving deposit growth that should help maintain LDRs within a manageable range. It expects margin recovery to continue as deposit repricing benefits flow through, CRR cuts ease funding pressures, and higher-yielding retail and unsecured portfolios regain traction.
Net Interest Income (NII) and Pre-Provisions Operating Profit (PPOP) growth are expected to strengthen meaningfully, while asset quality trends across both secured and unsecured portfolios remain encouraging, indicating that credit costs should continue moderating.
“Broadly, the sector enters H2 with the strongest visibility seen in several quarters, led by improving NIM trajectory, improving growth vectors, easing risk metrics, and stable regulatory frameworks,” Axis Securities said.
Stocks to buy in the banking sector
In the banking sector, the top conviction ideas by Axis Securities includes HDFC Bank, Kotak Mahindra Bank, State Bank of India (SBI), Federal Bank and Ujjivan Small Finance Bank.
HDFC Bank | Buy | Target Price: ₹1,170
Axis Securities believes HDFC Bank is on track to accelerate growth, with NIM estimated to improve to 3.8% over FY27-28E as against 3.6% in FY26. It has a ‘Buy’ call on HDFC Bank shares, with a target price of ₹1,170 apiece.
Kotak Mahindra Bank | Buy | Target Price: ₹2,575
Kotak Mahindra Bank is expected to see improvement in NIMs, supported by an increasing mix of higher-yielding unsecured segments, while its overall credit growth is expected to remain robust at ~17% CAGR over FY26–28E, supported by a gradual improvement in the unsecured portfolio mix.
Axis Securities has a ‘Buy’ rating on Kotak Mahindra Bank shares with a target price of ₹2,575 apiece.
SBI | Buy | Target Price: ₹1,135
The brokerage house expects consistent RoA and RoE delivery of 1% – 1.1% and 14% – 16% over FY26-28E for SBI. It has a ‘Buy’ call on the stock, with SBI share price target of ₹1,135 apiece.
Federal Bank | Buy | Target Price: ₹265
Backed by expectations of impeccable strategy execution, Axis Securities expects Federal Bank’s RoA improvement to 1.2% – 1.4% over FY27–28E, supported by healthy risk-adjusted credit growth; margin improvement levers playing out with portfolio mix shift towards better-yielding segments and lower CoF; strong deposit franchise with improving CASA mix; strengthened fee income profile; and stable asset quality metrics keeping credit costs under control.
It has a ‘Buy’ rating on Federal Bank shares with a target price of ₹265 per share.
Ujjivan Small Finance Bank | Buy | Target Price: ₹60
Ujjivan Small Finance Bank is expected to deliver a healthy credit growth of ~22% CAGR, and maintain margins at 7.6-7.8% over FY26-28E. The brokerage firm has a ‘Buy’ rating on Ujjivan Small Finance Bank stock with a target price of ₹60 per share.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
