Across brokerage reports of Systematix, YES Securities, and Elara Capital, 10 banking stocks emerged as consistent picks or preferred names for the quarter ahead: ICICI Bank, Axis Bank, HDFC Bank, Kotak Mahindra Bank, State Bank of India, Bank of Baroda, Indian Bank, Ujjivan Small Finance Bank, DCB Bank and City Union Bank.
Credit growth holds firm across segments
One of the strongest signals heading into Q3 is the durability of loan growth. RBI data shows banking system advances growing nearly 12% year-on-year and 4.5% quarter-on-quarter as of mid-December 2025. Growth has improved across key segments, especially micro and small enterprises, services and retail loans.Industrial credit growth has picked up meaningfully, driven by small businesses, while services lending has also accelerated. Retail credit remains steady, with vehicle loans and personal loans showing faster growth. At the same time, credit card lending has slowed further, pointing to a gradual cooling in unsecured retail stress.
Systematix Equities estimates loan growth of about 11.6% year-on-year for its coverage universe in Q3. Banks such as HDFC Bank, Axis Bank, ICICI Bank, Bank of Baroda, Indian Bank and SBI are expected to grow faster than the sector average.
JM Financial also expects credit growth momentum to strengthen, led by retail, MSME and services loans, with mid-sized banks and small finance banks showing relatively stronger sequential growth.
Deposits lag, but liquidity stays manageable
While loans are growing steadily, deposit growth continues to trail advances. System-level deposits rose 9.7% year-on-year in December, pushing the credit-deposit ratio above 81%. This has made deposit mobilisation more competitive, with banks relying more on certificates of deposit and selective rate hikes in certain buckets.
Brokerages caution that deposits remain the key pressure point for the sector. Elara Capital highlights that slower growth in low-cost deposits and higher credit-deposit ratios could limit the benefit of liability repricing in FY27. Still, for Q3, liquidity conditions remain comfortable, supported by surplus system liquidity and CRR cuts announced earlier in the year.
Larger banks with strong liability franchises are seen as better positioned in this environment. “Liabilities could become assets in FY27,” Elara said, explaining why it prefers large private banks such as ICICI Bank and Kotak Mahindra Bank, along with SBI among PSU lenders.
Margins stabilise as repricing benefits kick in
Net interest margins are expected to remain largely stable in Q3, a welcome change after steady pressure earlier in FY26. Although yields on advances continue to decline due to past repo rate cuts, the benefit of lower term deposit rates is now beginning to show, thanks to the lagged repricing of fixed-rate deposits.
Systematix expects margins to stay broadly flat sequentially, helped by CRR cuts and deposit repricing. Most banks are likely to see only marginal movements, with some reporting small declines of a few basis points and others showing modest improvement.
JM Financial echoes this view, saying the full benefit of CRR cuts should offset earlier rate-cut pressure in Q3, while the December repo cut is unlikely to affect margins until Q4 or FY27.
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YES Securities, however, expects a mild sequential decline in NIMs across most banks, clustering around a 5-basis-point drop, but notes that loan spreads have actually improved due to sharper cuts in deposit rates compared with lending rates.
Fees rise, treasury gains ease
Fee income is expected to improve sequentially in Q3, supported by higher loan disbursements, better transaction activity and stable business momentum. This should help offset weaker treasury income, as bond yields moved higher during the quarter, limiting mark-to-market gains.
Systematix points out that while trading gains are likely to decline, core operating income remains healthy. Operating expenses are also expected to stay largely flat sequentially, as wage revisions and seasonal cost increases were largely absorbed in the previous quarter.
Asset quality steadies, unsecured stress moderates
Another clear trend emerging in Q3 is the stabilisation in asset quality. Stress in unsecured lending, particularly microfinance, has eased compared with earlier quarters. Slippages in most portfolios are expected to remain stable, although seasonal stress in agriculture loans could lead to a mild uptick.
YES Securities expects provisions to decline sequentially for several banks, including HDFC Bank, Axis Bank, Kotak Mahindra Bank, Bank of Baroda and Indian Bank, reflecting better collections and lower incremental stress. JM Financial also expects credit costs to remain stable or improve, especially for small finance banks, where collection efficiency has strengthened.
Profits turn positive after a weak first half
With loan growth holding up, margins stabilising, and credit costs improving, Q3 is expected to mark a turning point for earnings. Systematix expects year-on-year profitability to improve for most banks in its coverage universe, reversing the contraction seen in Q2.
JM Financial estimates net interest income growth of about 4.7% year-on-year and pre-provision operating profit growth in low double digits. While headline profit growth may still be modest, the direction of travel is clearly improving. Large banks such as HDFC Bank and ICICI Bank are expected to deliver strong return ratios, while SBI’s profitability is also seen improving sequentially.
According to YES Securities, SBI is expected to report 2% growth in net profit on 7% rise in net interest income, while HDFC Bank is expected to clock a bigger profit jump of 12% YoY.
Clear trends to watch
Taken together, brokerages highlight three clear themes for Q3. First, growth remains intact, led by retail and MSME loans, even as deposits lag. Second, margins are no longer deteriorating sharply, with repricing benefits starting to show. Third, asset quality is stabilising, reducing downside risk to earnings.
Against this backdrop, investor focus is likely to remain on banks with strong balance sheets, stable deposit franchises and diversified loan books. As Q3 numbers begin to roll out, investors will be watching whether these trends hold and whether banks can sustain the recovery into the fourth quarter, when the debate will shift from margin defence to growth durability.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)