JM Financial has highlighted six Indian banks as top picks for FY27, banking on robust loan growth despite margin challenges. Investors are keeping a close watch on deposit mobilization and rising funding costs across the sector.
As the Indian banking sector enters its first-quarter earnings cycle, brokerage firm JM Financial has released its outlook for FY27, identifying six lenders that it believes are well-positioned for growth. The selected stocks are ICICI Bank, Axis Bank, State Bank of India (SBI), Ujjivan Small Finance Bank, DCB Bank, and City Union Bank.
Growth Drivers Amid Funding Challenges
The brokerage points to a combination of healthy loan expansion and stable asset quality as the primary engines for profitability. Recent data across 28 banks shows that loan growth for the April-June quarter reached approximately 16.4% on a year-on-year basis, notably outstripping deposit growth, which hovered around 12.3%. This gap between credit and deposit growth has made deposit mobilization a critical area of focus for lenders looking to maintain liquidity.
While loan books are expanding, banks are grappling with pressure on their Net Interest Margins—the difference between the interest earned on loans and the interest paid on deposits. This margin pressure is largely driven by higher funding costs, partly due to an increased reliance on high-cost Certificates of Deposit (CDs). Additionally, the shift toward lower-yield segments like corporate lending and home loans is weighing on overall profitability metrics.
Asset Quality and Sector Trends
Despite the competitive landscape for deposits, the asset quality outlook for these institutions remains relatively stable. Data indicates that stress levels in unsecured retail and microfinance portfolios have moderated, with collection efficiencies showing consistent performance. For instance, Ujjivan Small Finance Bank has reported improvements in its Gross Non-Performing Assets, a trend that helps protect the bottom line even when margins face seasonal hurdles like agricultural loan slippages.
On the credit front, recent Reserve Bank of India data highlights that a significant portion of incremental lending is currently flowing toward large corporate entities and non-banking financial companies. Among private lenders, Axis Bank has emerged as a leader in loan growth, while smaller lenders such as Ujjivan and Equitas have maintained growth rates exceeding 25% on an annual basis.
What Investors Should Monitor
For investors following these trends, the most critical monitorable in the coming months will be the cost of deposits. As lenders struggle to balance their credit-to-deposit ratios, any further increase in funding costs could impact net interest income, which is projected to grow by approximately 11% year-on-year for the brokerage's coverage universe.
Additionally, market participants should track the impact of updated regulatory requirements, such as the Liquidity Coverage Ratio (LCR) trends, as well as the progress of credit schemes like the Emergency Credit Line Guarantee Scheme 5.0. Monitoring for any early signs of stress in the small and medium enterprise (SME) or unsecured retail loan segments will also be essential to gauge the health of these banks as the financial year progresses.