India’s banking and financial services (BFSI) sector has emerged from the Q4FY26 earnings season with strong fundamentals, characterized by improving asset quality, stable credit growth, and sharply declining credit costs.
A comprehensive sector report by Axis Securities maintains a highly constructive outlook for the industry over the next two years. The brokerage highlights that corporate credit demand is recovering steadily alongside resilient retail demand, while previous stress in unsecured lending portfolios has finally begun to ease across geographies.
Key Trends Shaping the Financial Sector
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The Shift to Mid-Sized Lenders: Mid-sized private banks and small finance banks (SFBs) are projected to outperform their larger peers in loan growth and margin improvements over the medium term.
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PSU Bank Efficiency: Public Sector Undertaking (PSU) banks are expected to benefit significantly from lower stress formation and better operating efficiencies.
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Unsecured Stress Recedes: The major headwind of the past year—unsecured retail loan defaults—has sharply moderated, entering a much more stable asset quality cycle.
Top Conviction Stock Picks by Axis Securities
The brokerage has identified several top-performing lenders and Non-Banking Financial Companies (NBFCs) as high-conviction ideas for investors:
1. ICICI Bank (Target Price: ₹1,700 | Rating: Buy)
ICICI Bank remains a top-tier private sector pick. Axis Securities expects the lender to deliver a stellar 16% CAGR credit growth over the FY26–FY28 period.
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Key Drivers: Stable net interest margins, easing unsecured portfolio stress, and a highly benign credit cost outlook where costs are expected to be contained below 50 basis points.
2. Kotak Mahindra Bank (Target Price: ₹500 | Rating: Buy)
The brokerage believes that the worst of the unsecured loan stress cycle is officially in the past for Kotak.
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Key Drivers: Lower slippages, improved collection efficiency across credit cards and microfinance (MFI), and robust fee income. Ongoing automation and digitization are also expected to lower operating cost ratios through FY27 and FY28.
3. State Bank of India (Target Price: ₹1,285 | Rating: Buy)
SBI remains the preferred pick among public sector lenders, backed by broad-based loan growth across corporate, retail, and agricultural segments.
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Key Drivers: The brokerage projects a 14% CAGR advances growth over FY26–FY28. Notably, SBI is expanding its exposure to high-growth emerging sectors, including renewable energy, power transmission, and the semiconductor ecosystem.
4. Federal Bank
Federal Bank stands out for its healthy asset quality profile, improving Current Account Savings Account (CASA) mix, and calibrated deposit repricing strategy. Analysts also note that the bank has limited direct exposure to risks linked to the ongoing Middle East geopolitical tensions.
5. Ujjivan Small Finance Bank (Target Price: ₹78)
Ujjivan is successfully shifting its strategy by diversifying its loan book and aggressively increasing its share of secured loans. This defensive pivot is expected to ensure highly stable growth and moderating credit costs through FY27.
6. Bajaj Finance (Target Price: ₹1,160)
As the top pick among NBFCs, Bajaj Finance is backed by strong customer additions and robust Assets Under Management (AUM) growth. Axis Securities notes that the company’s heavy investment in AI-led operational efficiency initiatives will likely push its return ratios even higher in FY27.
Outlook for NBFCs
Beyond the major banking institutions, Axis Securities remains highly positive on select niche NBFCs like Shriram Finance and CreditAccess Grameen. Both companies are well-positioned to benefit from healthy growth outlooks, stable margins, and rural economic resilience, making the broader financial space a primary driver for equity market growth over the medium term.
