India's banks poised for re-rating, top picks have up to 31% upside: Nomura

Global brokerage firm Nomura wrote in its note that the Indian banking sector is turning a corner, with profitability set to improve after several quarters of pressure from shrinking net interest margins (NIMs) and higher credit costs.

The brokerage said the latest Q2FY26 earnings suggest NIM compression has likely bottomed out, and it expects a gradual recovery as banks re-price term deposits.

It added that easing stress in unsecured retail and microfinance portfolios should help bring down credit costs, supporting a 15 basis point expansion in sector RoAs over FY26-28.

Nomura expects system credit growth to pick up to 13% in FY26F and 14% in FY27F, compared to 11% as of October 31, 2025, aided by supportive fiscal and monetary policies.

The brokerage sees the sector delivering a strong 16% earnings CAGR over FY26-28F, more than double the 7% CAGR recorded during FY24-26F.

It also believes valuations remain attractive at 2.1 times one-year forward book, and that improving RoAs and a robust earnings trajectory make a case for a sector re-rating.

Nomura prefers banks with stronger return profiles, cleaner balance sheets and a solid liability franchise. Its top picks are Axis Bank, ICICI Bank and State Bank of India

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Within private banks, Nomura favours Axis Bank and ICICI Bank. It expects Axis to benefit from improving loan growth, better asset-quality visibility and reasonable valuations, while ICICI remains its preferred compounding play given leadership in loan and deposit growth, asset quality and profitability metrics.

HDFC Bank, which is also rated 'Buy', needs to demonstrate stronger deposit mobilisation, with its credit-deposit ratio at 98%, to support a sustained recovery in loan growth.

Among public-sector lenders, Nomura prefers SBI over Bank of Baroda, citing SBI's stronger core profitability.

In the mid-tier space, it likes IndusInd Bank as a turnaround candidate, while maintaining a 'Neutral' stance on AU Small Finance Bank as the brokerage believes existing valuations already capture the positives. It is also 'Neutral' on Bandhan Bank, balancing valuation comfort with ongoing asset-quality concerns.

Nomura's pecking order for the sector stands at: Axis Bank, ICICI Bank and SBI. It flagged subdued loan growth, aggressive rate cuts and asset-quality deterioration as the key risks to its view.