Banking Sector Outlook: Banks like Axis Bank, Federal Bank, RBL Bank, IDFC First Bank, Ujjivan SFB and Equitas SFB have given guidance of improving margin trajectory from stable…
highlights
- The outlook for the banking sector remains strong due to strong credit growth, improving funding, stable NIM and improved asset quality.
- The outlook for India’s banking sector is stable, supported by strong economic growth.
- Axis Bank remains the preferred option among universal banks.
Centrum Broking has said in one of its reports that the outlook of India’s banking sector is stable, which is supported by strong economic growth. The brokerage said most of the banks under coverage delivered good double-digit loan and deposit growth in Q3FY26, with IDFC First Bank, AU SFB and Ujjivan SFB leading the way.
How is the report card of Indian banks?
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Centrum Broking, in its outlook report on the banking sector, said growth for banks was mixed as lenders saw a rise in LDR ratios. Sector NIMs showed clear signs of bottoming out and started improving during the quarter, supported by easy cost of funds, favorable deposit repricing and balance sheet optimisation.
Banks like Axis Bank, Federal Bank, RBL Bank, IDFC First Bank, Ujjivan SFB and Equitas SFB gave guidance of margin trajectory from stable to better. Asset quality trends remained encouraging, with core GNPA ratios at universal banks stable at low levels and stress in the MFIs and unsecured retail segments easing significantly after peaking in previous quarters, supported by reduction in slippages and improvement in delinquency indicators.
Overall, improvement in funding, asset quality and loan growth have strengthened the outlook for the sector.
Increase in loan and deposit growth
Small finance banks won
The brokerage report said that growth was seen in retail (home loan, vehicle loan), microfinance (MFI) and some commercial segments. Deposit growth also remained satisfactory, with many banks registering growth of 12% to 23% YoY, with small finance banks (SFBs) especially showing better deposit growth than larger banks. Improvement was also seen in the quality of deposits.
NIM improves, margins bottom out
Despite pressure on advance yields due to continuous repo rate cuts, NIMs have moved from stable to improving in Q3FY26 –
- Federal Bank’s NIM increased to 3.18% from 3.06% in Q2. The gains came from a 130bps rise in the CASA ratio and low-cost deposits.
- Axis Bank reported 3.64% NIM (9bps decline QoQ), but management believes NIM has now bottomed and maintains Q4 guidance of 3.8%.
- RBL Bank also expressed hope of margin improvement due to term deposit repricing.
- IDFC First Bank’s NIM rose 16bps to 5.76%, with new guidance of 5.85% for Q4FY26.
Margins of small finance banks also improved. NIM is likely to remain stable or improve in Q4FY26 due to low cost funds and deposit repricing –
- Ujjivan SFB’s NIM increased from 7.9% to 8.2%.
- Equitas SFB’s NIM increased to 6.72% from 6.29%.
asset quality improvement
There have also been positive signals on the asset quality front in Q3FY26-
- Axis Bank’s GNPA was 1.44% and NNPA was 0.42%.
- ICICI Bank’s GNPA was recorded at 1.53% and NNPA at 0.37%.
- Federal Bank’s GNPA was 1.72% and NNPA was 0.42%, which is better on QoQ basis.
The pressure which was seen earlier in the MFI and Personal Loan (PL) segment now seems to be reducing-
- Ujjivan said MFI delinquency has declined and slippage has come down to ₹221 crore (earlier ₹278 crore). The SMA-2 pool declined to 1.6%, the lowest since FY25.
- The Federal Bank and AU SFB also said that MFI slippages had peaked in Q1, which have now declined in Q2 and Q3.
Overall, declining slippages and delinquency trends (delays in repaying bank loans or fees) indicate that asset quality is moving towards normal levels.
Which bank is the brokerage’s top pick?
Centrum said Axis Bank remains its top pick, while Equitas SFB and Suryoday SFB are also among its top picks.
| bank name | rating | share price target |
| Axis Bank | BUY | 1,460 |
| AU Small Finance Bank | BUY | 1,208 |
| Iquitos Small Finance Bank | BUY | 80 |
| Federal Bank | neutral | 305 |
| ICICI Bank | BUY | 1,760 |
| IDFC First Bank | neutral | 80 |
| RBL | neutral | 297 |
| SURYODAY SMALL FINANCE BANK | BUY | 236 |
Disclaimer: This article is for informational purposes only and should not be construed as investment advice in any way. ET NOW Swadesh recommends its readers and viewers to consult their financial advisors before taking any money-related decisions.
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