In Q3FY26, banks, including small finance banks (SFBs), exhibited credit growth slightly surpassing Axis Direct’s projections, indicating a widespread lending momentum across different sectors, as stated in the brokerage’s Q3 review of the Banking, Financial Services, and Insurance (BFSI) sector.
The brokerage noted that credit increased by 13% year-on-year and 5% quarter-on-quarter, with public sector undertakings (PSU) banks outperforming their larger private counterparts during this timeframe.
The growth was primarily fueled by retail lending—especially in home loans, loans against property (LAP), and gold loans—as well as secured financing for SMEs, while there were initial signs of recovery in corporate credit, said Axis Direct in its report.
SFBs experienced a significant rebound, aided by a resurgence in unsecured lending and ongoing strength in their secured loan offerings, according to the brokerage house.
Deposit growth during the December quarter did not keep pace with the expansion of credit, resulting in increased loan-to-deposit ratios. Year-on-year deposits rose by 11% and by 2% sequentially, primarily driven by term deposits, while CASA mobilization has been relatively lackluster across most banks. Consequently, lenders have been adjusting their deposit structure to optimize funding costs, decreasing their dependence on expensive bulk deposits and concentrating on enhancing average CASA balances, as noted by the brokerage.
Top conviction picks
Following the Q3 results, Axis Direct has outlined its top conviction picks in the Banking, Financial Services, and Insurance (BFSI) sector, identifying opportunities among banks and non-banking financial companies (NBFCs).
For Tier I banks, the brokerage advises a ‘buy’ on Kotak Mahindra Bank Ltd, targeting a price of ₹515. In the public sector banking category, it favors State Bank of India with a target of ₹1,280. Among mid-sized and small banks, the brokerage suggests Federal Bank (target ₹320), City Union Bank (target ₹360), and Ujjivan Small Finance Bank (target ₹74).
In the NBFC arena, its top selections include Bajaj Finance Ltd with a target price of ₹1,150 and Shriram Finance with a target of ₹1,200, indicating a positive outlook on credit growth and enhancements in asset quality trends throughout the sector.
Recommendation Rationale
Kotak Mahindra Bank – As per the brokerage, the quality of assets at Kotak Mahindra Bank is showing signs of improvement, with an easing of stress in microfinance and personal loans sequentially, while the stress levels in credit cards have stabilized.
The bank has refined its underwriting processes in areas facing pressure and anticipates that credit costs will continue to decrease until Q1FY27, although they will remain higher than pre-COVID figures due to the elevated level of unsecured loans. Margins are expected to see a slight improvement in Q4, aided by changes in the loan mix and benefits from repricing, according to the brokerage house.
Growth in advances continues to be strong, fueled by secured and corporate lending, with the bank aiming for a gradual increase in unsecured loans. Overall, it is projected that credit growth will remain strong at approximately 17% CAGR over FY26–FY28.
State Bank of India – Axis Direct said that SBI has updated its credit growth forecast to 13–15%, driven by widespread momentum in retail, SME, and corporate sectors, as well as robust gold loan performance. The bank anticipates support for growth from policy initiatives, tax reforms, and a rebound in economic activity.
According to the brokerage, management intends to keep net interest margins (NIMs) above 3% throughout various cycles through careful deposit pricing and expanding CASA, even though the benefits from repricing have slowed.
The asset quality is strong with low credit costs, which bolsters earnings predictability. With a continued emphasis on enhancing its liability franchise, investing in higher-yielding assets, and adopting technology-driven efficiencies, SBI is projected to sustain a solid performance and achieve a return on assets (RoA) exceeding 1% from FY26 to FY28, as per the brokerage report.
Federal Bank – According to the brokerage, Federal Bank demonstrated a favorable surprise in margins, with NIMs increasing by 12 basis points, aided by balance sheet optimization, deposit repricing, and benefits from the Cash Reserve Ratio (CRR). The bank is actively working on enhancing margins through adjustments in its asset mix and strengthening liabilities through CASA, while adopting a cautious approach towards unsecured lending.
As per Axis Direct, stress levels in the Microfinance Institution (MFI) segment seem to have reached their peak, with credit costs anticipated to remain stable at 55–60 basis points in FY26. Trends regarding asset quality are steady, fee income is on the rise, and CASA growth is robust. Overall, the bank is expected to maintain a strong performance, with Return on Assets (RoA) projected to rise to 1.3–1.4% over FY27–FY28.
City Union Bank – As stated by the brokerage firm, City Union Bank has shown robust credit growth and anticipates this trend to persist, primarily fueled by MSME and gold loans. Margins are holding steady with a stable NIM forecast, aided by deposit repricing. The enhancement in asset quality and profitability is expected to maintain strong performance, with projections indicating that credit, NII, and earnings will increase by approximately 18% CAGR.
Ujjivan Small Finance Bank – As per the brokerage firm, Ujjivan Small Finance Bank anticipates enhanced growth with the improvement in MFI acquisitions and a decrease in rejection rates. The pressure on asset quality is diminishing, and credit costs are expected to stabilize by FY27. Net Interest Margins (NIMs) should continue to be upheld by reduced funding expenses, although yields might decline as the loan composition slowly transitions towards secured lending.
Bajaj Finance- As per the brokerage, Bajaj Finance has enhanced its provisioning with a Loss Given Default (LGD) floor, which strengthens its balance sheet while minimizing the impact for FY27. Trends in asset quality have shown improvement, and credit costs are projected to be in the range of 165–175 basis points. The company is maintaining disciplined growth with guidance set at 22–23%, while Net Interest Margins (NIMs) are anticipated to remain stable around 8.8% as funding costs are expected to stay within a consistent range moving forward.
Shriram Finance – As per the brokerage firm, Shriram Finance Ltd anticipates that NIMs will remain around 8.5-9% due to reduced funding costs and rating advantages. The asset quality is stable in both the CV and MSME sectors, with advancements in utilization and repayments. Credit costs are expected to decline further. The management aims for continued growth, targeting an 18-20% increase in AUM over the next two to three years.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
