The 3QFY26 earnings season could mark a meaningful acceleration in growth momentum for the banking sector, aligning with the underlying economic upcycle. However, we expect NIMs to be largely stable or slip a bit in Q3 but bottom out by Q4 after one more rate cut. On the asset quality front, a steady improvement trend is likely to continue in unsecured loan stress as well as credit cost, thereby supporting profitability. That said, we watch out for the implementation of the new labor code, provisions on projects under implementation, and moratorium on MSME loans in Q3. Our medium-to-long term preferred picks on earnings resilience and recovery play are HDFCB, ICICI, RBL, SBI, CBK, BOB, and SBI Cards.

Credit growth set to accelerate; rate cuts to push back margin normalization System credit growth improved to 11.7%/4.2% QoQ (as on 15-Dec-25), mainly due to improving traction in mid-corporate, MSME, wholesale/retail trade, and retail (including vehicle, gold, and loan against FD and PL) lending businesses. However, mortgage growth still remains relatively moderate despite rate cuts, mainly for PVBs. On the other hand, PSBs are reporting stronger growth across RAM and corporate segments, leading to continued market-share gain. Deposit growth remains slow, leading to liquidity constraints, and thus, RBI intervention via heavy OMOs could support systemic liquidity. Within our PVB coverage, we expect ICICI, Axis, Kotak, IDFC, AU, CUBK, and KVB to report better credit growth momentum, while IIB is likely to report further decline in portfolio. We expect NIMs to be largely stable/slightly dip in Q3, partly aided by CRR, deposit rate cuts, and some improvement in CASA ratios. However, Q4FY26/Q1FY27 could see relatively higher margin pressure due to the cumulative effect of rate cuts in Dec-25/Feb-26, post which we expect NIMs to start normalizing or to improve for select banks.