Foreign brokerages are turning selectively bullish on Indian banks, citing healthy credit growth, improving funding conditions, stable asset quality and a potential recovery in earnings. ICICI Bank has emerged as a key preferred large private bank, while SBI has received a more measured view.

Foreign brokerages Goldman Sachs and Bernstein have adopted a constructive but selective stance on India's banking sector, expecting profitability to improve over the next few years as credit growth strengthens and funding conditions become more favourable.

The latest sector assessments point towards a potentially favourable earnings cycle for Indian lenders, supported by stronger retail and MSME lending, improving deposit mobilisation, stable net interest margins (NIMs), benign credit costs and continued control over operating expenses.

However, analysts are not equally positive on all banking stocks. The latest recommendations show a clear preference for certain private-sector lenders, while several mid-sized and public-sector banks have received neutral or negative ratings.

Credit Growth Seen at 13–15% in FY27

Bernstein expects loan growth across the banking sector to remain healthy at around 13–15 per cent in FY27.

The brokerage believes higher nominal economic growth and relatively comfortable liquidity conditions could support credit expansion. Retail lending and the MSME segment are expected to remain important contributors to overall loan growth.

However, Bernstein cautioned that any policy tightening in response to rising inflation could moderate the pace of credit expansion later in the year.

This makes the trajectory of interest rates and inflation an important variable for bank investors.

NIM Pressure Could Ease

Net interest margins have remained an important area of concern for banks as deposit costs adjusted following the previous interest-rate cycle.

Bernstein believes much of the deposit repricing has now taken place, potentially reducing pressure on NIMs.

The brokerage expects margins to remain broadly stable, while a potential rise in policy rates could provide a near-term benefit to lending yields.

Goldman Sachs is also seeing potential for NIM improvement, citing a combination of better funding conditions and a shift towards higher-margin loan categories.

Goldman Sachs Sees High-Teen PPoP Growth

Goldman Sachs expects the banking sector's core pre-provision operating profit (PPoP) to accelerate to high-teen growth during FY27-FY29.

This is significant because PPoP reflects the underlying operating performance of banks before provisions and taxes.

The brokerage's earnings recovery thesis is based on:

• Recovery in retail credit growth

• Continued MSME loan momentum

• Better deposit mobilisation

• Stable or improving NIMs

• Lower pressure from credit costs

• Continued operating-cost discipline

If these factors materialise together, banks could see operating earnings grow faster than expenses.

ICICI Bank Emerges as a Top Private-Bank Pick

ICICI Bank is among the strongest preferences of the foreign brokerages.

Goldman Sachs expects the bank's core PPoP to grow at around 17 per cent over FY26-FY29.

Bernstein has also assigned an 'Outperform' rating to ICICI Bank.

The bank's diversified loan book, strong retail franchise, asset-quality performance and relatively consistent profitability have helped it remain a preferred name among analysts.

The key investment argument is that ICICI Bank could participate strongly in a broader banking earnings recovery while maintaining relatively healthy profitability.

HDFC Bank Gets Support Despite Earnings Concerns

Goldman Sachs has initiated coverage on HDFC Bank with a 'Buy' rating.

The brokerage expects consensus earnings estimates to potentially undergo further downward revisions, but believes the stock's valuation provides sufficient support.

Bernstein is more positive and has assigned HDFC Bank an 'Outperform' rating.

For investors, the key factors to monitor will be the pace of loan growth, deposit mobilisation and the bank's ability to maintain margins following the integration and balance-sheet changes associated with its merger history.

Axis Bank Also Finds Favour

Axis Bank is another major private-sector lender receiving favourable coverage.

Goldman Sachs has given the stock a 'Buy' rating, while Bernstein has rated it 'Outperform'.

Analysts expect the bank to benefit from improving credit growth and an eventual recovery in operating profitability.

The bank's ability to grow deposits at a healthy pace while maintaining asset quality will remain crucial to the investment case.

Kotak Mahindra Bank: Brokerage Views Diverge

Goldman Sachs sees Kotak Mahindra Bank among its preferred large private banks and expects core PPoP growth of around 15 per cent during FY26-FY29.

However, Bernstein has a more cautious 'Market-Perform' view on the lender.

The difference in ratings highlights the importance of valuation and earnings expectations. While Goldman Sachs sees scope for operating improvement, Bernstein appears less convinced that the potential upside is sufficient at current valuations.

IndusInd Bank Gets Mixed Signals

IndusInd Bank is another stock where brokerage views differ.

Bernstein has assigned the bank an 'Outperform' rating, while Goldman Sachs has initiated coverage with a 'Neutral' stance.

The contrasting views suggest that the market will likely demand evidence of sustained improvement in profitability and asset quality before assigning a stronger valuation multiple.

For investors, the bank's turnaround trajectory and return on equity will remain important indicators.

SBI Remains a Strong Franchise but Gets Neutral Ratings

Despite being India's largest lender by several key measures, State Bank of India (SBI) has not emerged as a top pick in the latest foreign brokerage reports.

Bernstein has assigned SBI a 'Market-Perform' rating, while Goldman Sachs has rated it 'Neutral'.

Goldman Sachs recognises SBI's advantages, particularly its strong funding franchise and improving fee-income profile.

However, the brokerage expects gradual normalisation of credit costs and structurally lower core PPoP margins to weigh on return on assets.

This explains why the brokerage remains positive on the bank's underlying franchise but does not expect the same degree of re-rating potential as some private-sector peers.

Goldman Sachs Turns Cautious on Bank of Baroda, PNB

The cautious stance becomes more pronounced among selected public-sector lenders.

Goldman Sachs has initiated coverage on:

• Bank of Baroda — Sell

• Punjab National Bank — Sell

• State Bank of India — Neutral

The brokerage expects structurally lower core operating margins and normalisation of credit costs to constrain profitability at some PSU lenders.

This suggests that the broader improvement in the banking sector may not automatically translate into similar stock-market performance across all public-sector banks.

AU Small Finance Bank Gets a Buy Rating

Among smaller lenders, Goldman Sachs has initiated coverage on AU Small Finance Bank with a 'Buy' rating.

The bank's differentiated business model and potential for continued growth make it one of the more positively viewed names in the mid-sized banking universe.

However, investors will need to track deposit mobilisation, credit costs and the bank's ability to sustain returns as its balance sheet expands.

Federal Bank Seen as a Turnaround Opportunity

Federal Bank has also received a 'Buy' rating from Goldman Sachs.

The brokerage views the lender as a turnaround story, with its ongoing transformation potentially creating room for improvement in profitability and operating metrics.

A sustained improvement in return ratios could become an important trigger for further investor interest.

Yes Bank and RBL Bank Face Negative Calls

Goldman Sachs has taken a significantly more cautious view of Yes Bank and RBL Bank, initiating both with 'Sell' ratings.

The negative ratings indicate that the brokerage does not currently see sufficient evidence of the profitability and return-on-equity improvement required to support a meaningful re-rating.

For smaller banks, the ability to consistently generate returns above the cost of equity remains particularly important.

RoE Is Becoming the Key Valuation Metric

Goldman Sachs believes further re-rating for mid-sized banks will require sustained return on equity above the cost of equity.

This is an important distinction between simply growing the loan book and creating shareholder value.

A bank can deliver strong loan growth but still struggle to generate attractive shareholder returns if:

• Funding costs remain elevated

• Credit costs rise

• Operating expenses increase rapidly

• NIMs contract

• Capital requirements dilute profitability

Consequently, investors are likely to focus increasingly on the quality of growth rather than just headline loan-growth numbers.

Asset Quality Remains a Major Positive

Both brokerages see relatively benign asset-quality conditions as a major support for the banking sector.

Bernstein said there are no meaningful signs of deterioration in system-wide stress indicators.

Goldman Sachs also expects continued improvement in the performance of unsecured loans.

Lower credit costs can have a significant impact on profitability because every reduction in provisioning can flow through to bottom-line earnings, provided operating conditions remain stable.

Deposit Growth Could Become the Next Battleground

With credit growth expected to accelerate, deposit mobilisation will become increasingly important.

Banks need to ensure that deposits grow sufficiently to fund their loan books without sharply increasing the cost of funds.

Goldman Sachs expects FCNR(B) deposit mobilisation to provide additional support to the banking system.

A better deposit environment could ease funding pressure and allow banks to expand lending while protecting margins.

Banking Stocks and Brokerage Ratings

What Could Drive Bank Stocks Going Forward?

Several variables could determine whether the expected banking earnings recovery translates into stronger stock performance.

1. Loan Growth

A sustained recovery in retail, MSME and corporate credit would strengthen the revenue outlook for lenders.

2. Deposit Mobilisation

Banks with strong low-cost and stable deposit franchises could have an advantage if competition for deposits intensifies.

3. Net Interest Margins

Stable NIMs would provide a strong foundation for earnings growth, while margin compression could offset gains from higher loan volumes.

4. Credit Costs

Continued benign asset quality and lower provisioning requirements could provide an additional boost to net profit.

5. Return on Equity

For mid-sized banks in particular, sustained RoE above the cost of equity could become necessary for meaningful valuation re-rating.

6. Interest-Rate Direction

Changes in monetary policy could affect both lending yields and funding costs, making the interest-rate cycle an important driver of bank profitability.

Risks That Could Challenge the Positive View

Despite the constructive brokerage outlook, several risks remain.

A sharper-than-expected rise in inflation could trigger tighter monetary policy and slow credit demand. At the same time, aggressive competition for deposits could increase funding costs and put pressure on NIMs.

A deterioration in unsecured-loan performance or corporate asset quality could also push credit costs higher.

Geopolitical uncertainty remains another risk, particularly if it affects crude oil prices, inflation, currency markets or domestic economic growth.

Key Takeaway

The latest foreign brokerage reports suggest that India's banking sector could be entering a stronger earnings phase, but the recovery is unlikely to benefit every lender equally.

ICICI Bank stands out as a key preferred large-cap private bank, while HDFC Bank and Axis Bank also receive strong support from both Goldman Sachs and Bernstein. Kotak Mahindra Bank receives a more divided assessment, while SBI's strong franchise is balanced by a relatively neutral valuation view.

Among smaller lenders, AU Small Finance Bank and Federal Bank receive positive ratings from Goldman Sachs, whereas Yes Bank and RBL Bank remain under pressure from a valuation and return-profile perspective.

For the banking sector as a whole, the next phase is likely to be determined not simply by faster credit growth, but by how efficiently banks convert that growth into sustainable margins, lower credit costs and higher returns on equity.