Nomura picks 3 bank stocks ahead of major re-rating in Indian Banks; Do you hold any?

SYNOPSIS: Nomura expects a re-rating in India’s banking sector, driven by improving margins, stronger credit growth, easing credit costs, and attractive valuations. Its top picks are Axis Bank, ICICI Bank and SBI.

Global brokerage firm Nomura believes India’s banking sector is poised for a significant re-rating as the industry transitions from a period of margin compression to one driven by earnings recovery. The firm noted that the profitability downcycle – characterised by sustained pressure on net interest margins (NIMs) and elevated credit costs – appears to be behind the sector, with banks now positioned to benefit from the gradual re-pricing of term deposits.

With early improvements visible across key operating indicators, Nomura expects the sector to reach a meaningful inflection point, supported by healthier loan growth, stronger return ratios and comparatively attractive valuations.

The brokerage further highlighted that easing stress in unsecured retail and microfinance segments should help moderate credit costs, paving the way for an estimated 15 basis points (bps) improvement in sector-wide return on assets (RoA) over FY26-28.

Nomura expects system-wide credit growth to accelerate to 13 percent in FY26F and 14 percent in FY27F, up from 11 percent as of 31st October 2025. This pickup, the brokerage said, will be supported by policy tailwinds, including a favourable repo-rate trajectory, tax adjustments, and reductions in CRR and GST.

It forecasts a robust 16 percent earnings CAGR for the banking sector over FY26-28F, more than double the 7 percent CAGR recorded in FY24-26F. Nomura further noted that sector valuations remain compelling at 2.1x one-year forward book, and that an improving RoAs combined with strong earnings momentum strengthens the case for a sector re-rating.

Within the private banking space, Nomura prefers banks with superior return ratios, healthier balance sheets, and strong liability franchises. Its top picks include Axis Bank, ICICI Bank, and State Bank of India.

It expects Axis Bank to benefit from improving loan growth, clearer asset-quality visibility and reasonable valuations. ICICI Bank remains its top compounding story, supported by leadership in loan and deposit growth, strong asset quality and superior profitability metrics.

Nomura also maintains a ‘buy’ rating on HDFC Bank but notes that the lender must strengthen deposit mobilisation, given its elevated credit-deposit ratio of 98 percent, to sustain an improvement in loan growth. Among public-sector banks, Nomura favours SBI over Bank of Baroda, citing SBI’s stronger core profitability and overall operating profile.

In the mid-tier segment, the brokerage identifies IndusInd Bank as a potential turnaround play. It remains ‘neutral’ on AU Small Finance Bank, believing current valuations already reflect most positives, and retains a ‘neutral’ stance on Bandhan Bank due to lingering asset-quality concerns despite valuation comfort.

Nomura’s overall pecking order for the sector is: Axis Bank, ICICI Bank and SBI. It highlights key risks to its outlook, including slower-than-expected loan growth, aggressive policy rate cuts and any deterioration in asset quality.

Conclusion

Nomura believes the Indian banking sector is entering a healthier earnings cycle after years of margin pressure and elevated credit costs. Improving credit growth, better asset quality trends, and favourable policy support provide a strong backdrop for a sector-wide re-rating. 

With valuations still reasonable, the brokerage sees meaningful upside potential – especially in banks with strong return profiles and robust liability franchises. Axis Bank, ICICI Bank, and SBI emerge as its preferred picks, though Nomura cautions that weaker loan growth, aggressive rate cuts, or asset-quality setbacks remain key risks to its optimistic outlook.

Written by Shivani Singh

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