SYNOPSIS:
CLSA expects Q2 FY26 to be the weakest quarter for banks in recent years, citing NIM compression and asset-quality stress. Loan growth forecasts were cut to 10 percent, though margin recovery is expected from Q3, with ICICI Bank and SBI among its top picks.
Global brokerage firm CLSA has cautioned that Q2 FY26 may turn out to be one of the weakest periods for banks in recent years, citing sequential pressure on net interest margins (NIMs) and stress in certain asset-quality segments.
The firm expects loan growth to stay subdued through September but notes that some signs of recovery could emerge thereafter. NIMs are projected to improve gradually, supported by the Reserve Bank of India’s (RBI) cut in the Cash Reserve Ratio (CRR) and the repricing of term deposits.
CLSA estimates that deposit costs may decline by around 5 basis points each quarter over the next six to seven quarters. While pressure in unsecured retail loans is expected to ease in the second half of the year, this may be offset by continued stress in other categories, particularly commercial vehicle (CV) loans. In line with this outlook, the brokerage has revised its forecast for sector-wide loan growth to 10 percent, down from the earlier estimate of 13 percent.
Analysts describe the current environment as a phase of “recalibration” rather than distress, as banks adjust to a softer interest-rate cycle and the lagging impact of deposit repricing.
Performance across banks has been uneven. Some private lenders delivered solid earnings, while most public sector banks showed signs of strain. Margin contraction remained a mutual concern, largely attributed to repo rate cuts. This trend is expected to persist into Q2 until the effects of rate changes are fully reflected.
From the third quarter onward, however, banks anticipate a gradual recovery in margins, aided by the repricing of deposits, which should provide stability to NIMs.
CLSA has highlighted the following three stocks as its top picks in the banking sector:
State Bank of India
With a market cap of Rs. 7.44 lakh crores, the stock moved up by around 0.4 percent on BSE, rising to Rs. 812.2 on Friday. On the financial front, SBI’s net interest income (NII) declined by around 3 percent QoQ but increased by about 2 percent YoY to Rs. 47,462 crores, while the net profit increased by nearly 8 percent QoQ and 10 percent YoY to Rs. 21,626 crores in Q1 FY26.
ICICI Bank Limited
With a market cap of Rs. 10.01 lakh crores, the stock moved down by around 1.2 percent on BSE, falling to Rs. 1,388.1 on Friday. On the financial front, the bank’s net interest income (NII) increased by around 3 percent QoQ and 11 percent YoY to Rs. 25,989 crores, while the net profit increased by nearly 0.3 percent QoQ and 15 percent YoY to Rs. 14,393 crores in Q1 FY26.
Bandhan Bank Limited
With a market cap of Rs. 26,323 crores, the stock moved up by around 1 percent on BSE, rising to Rs. 164.3 on Friday.On the financial front, the bank’s net interest income (NII) increased marginally by around 0.04 percent QoQ but fell about 8 percent YoY to Rs. 2,757 crores, while the net profit increased by nearly 17 percent QoQ but declined by nearly 65 percent YoY to Rs. 372 crores in Q1 FY26.
Written by Shivani Singh
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