Whalesbook
Banking Sector Outlook Improves
Following the Q4FY26 earnings season, Axis Securities is taking a more optimistic view on several banking and financial companies. The firm's positive outlook is based on improving asset quality, falling credit costs, and steady demand, which are expected to support earnings growth through FY28. This aligns with overall sector performance, as banks reported strong credit growth in Q4FY26, averaging 13-16% for private lenders and over 14% for public sector banks. System-wide loans grew by about 13.8% year-on-year by mid-March 2026. However, not all institutions show the same performance or risk profile.
Top Stock Picks and Valuations
ICICI Bank is a favored private banking choice, with Axis Securities maintaining a 'Buy' rating and a target price of ₹1,700, suggesting a 36% potential upside. The bank saw strong loan growth in Q4FY26, with forecasts predicting around 16% annual credit growth through FY28. Its shares trade near ₹1,246 with a market value of roughly ₹8.93 lakh crore. The stock's trailing P/E ratio is about 16.5x, which is higher than the Indian banking industry average of around 12x, indicating a premium valuation. State Bank of India (SBI) also received a 'Buy' rating and a ₹1,285 target, offering a 32% potential upside. SBI's stock trades around ₹979 with a market cap of ₹9.04 lakh crore and a P/E of about 10.8x, closer to its industry peers. SBI reported nearly 17% credit growth in Q4FY26.
Bajaj Finance is a top pick among non-banking financial companies (NBFCs), with a 'Buy' rating and a ₹1,160 target, pointing to a 26% potential upside. The stock currently trades around ₹912, with a market capitalization of ₹5.67 lakh crore and a P/E ratio of approximately 29.8x, reflecting its focus on growth. Axis Securities expects Bajaj Finance to grow its Assets Under Management (AUM) by 22-24% in FY27, driven by better asset quality and efficiency gains. Other high-growth NBFCs like Shriram Finance and CreditAccess Grameen are also favored, with target prices of ₹1,200 and ₹1,850, respectively.
Sector Trends and Valuation Insights
Banking sector asset quality has significantly improved, with Gross Non-Performing Assets (NPA) dropping to about 1.93% by March 2026. SBI’s GNPA ratio was 1.49% in Q4FY26, and ICICI Bank’s was 1.53% as of Q3 FY26. However, slower deposit growth compared to credit expansion has pushed the credit-deposit ratio to around 83%. This could strain Net Interest Margins (NIMs), even with stable core income. NBFCs are projected to grow AUM by 17-19% in FY26 but face funding challenges. Unlike banks, they cannot access cheap CASA deposits and depend on market borrowings. Bajaj Finance’s high P/E of 29.8x aligns with its expected 22-24% AUM growth. For comparison, Ujjivan Small Finance Bank trades at a P/E of 15.9x, higher than the sector average of 9.29x, despite posting over 25% credit growth.
Key Risks and Potential Headwinds
Despite Axis Securities' positive outlook, several risks need attention. Ongoing geopolitical tensions, particularly the West Asia conflict, could affect oil prices, inflation, and the Indian rupee. This may disproportionately impact small and medium-sized enterprises (MSMEs) and exporters. SBI and Punjab National Bank have paused new business in Gulf Cooperation Council countries as a precaution. A shift in household savings from deposits to market-linked investments could also increase funding costs and complicate liquidity management for banks. For NBFCs, while Bajaj Finance seems to be managing well, the wider microfinance sector faces stress from over-borrowing and collection difficulties in some areas. The premium valuations for some favored stocks, like ICICI Bank, leave little room for error compared to industry averages and peers.
Growth Prospects and Outlook
Axis Securities forecasts banks to achieve roughly 15% compound annual credit growth and NBFCs to see about 21% compound annual AUM growth between FY26 and FY28. This projection depends on ongoing operational efficiency, stable margins, and successful risk management. The Reserve Bank of India's efforts to strengthen financial sector resilience through updated provisioning rules also offer support. However, geopolitical developments and how financial institutions manage changing funding conditions and sector-specific pressures will significantly shape future growth.