Axis Direct’s top bank picks after Q1 earnings

ICICI Bank, Federal Bank among top bank picks by Axis Direct after Q1 earnings season Written by Rounak Khare.

Key points

• Kotak Mahindra Bank maintained core NIMs at 4.53% in Q1, backed by a stable cost of funds and improved liability mix.
• Ujjivan Small Finance Bank maintained net interest margins at 8.5% in Q1, backed by lower funding costs and better-yielding secured segments.
• Credit expansion accelerated to ~18% YoY, largely driven by Corporate, SME, and select Retail Segments, with banks seeing a revival in unsecured segment expansion as asset quality reservations normalised.
• ICICI Bank's credit expansion momentum accelerated further, with advances expansion robust at 20/5% YoY/QoQ, best amongst the larger pvt.
• Federal Bank's net interest margins improved in Q1, driven by lower cost of deposits and a favourable asset mix.

Banks, including small finance banks, fared better throughout parameters in a seasonally fragile Q1, with the key highlight of the quarter being robust credit expansion momentum throughout the board and solid asset quality performance. Credit expansion accelerated to ~18% YoY, largely driven by Corporate, SME, and select Retail Segments, with banks seeing a revival in unsecured segment expansion as asset quality reservations normalised. As per the coverage by Axis Direct, the Small/Mid-size banks outperformed their larger peers with expansion robust at 27% and 20% YoY respectively, closely followed by PSBs (+18% YoY) and larger private (pvt.) banks (+17% YoY).

Kotak Mahindra Bank maintained core NIMs at 4.53% in Q1, backed by a stable cost of funds and improved liability mix. While asset quality stayed stable, credit costs remained contained at 46bps. The unsecured portfolio indicated improving trends after underwriting recalibration. Management expects gradual expansion, backed by CASA mobilisation, retail recovery and inorganic opportunities. Notably, the brokerage recommended a Purchase on the stock, with a target rate of Rs 500.

ICICI Bank's credit expansion momentum accelerated further, with advances expansion robust at 20/5% YoY/QoQ, best amongst the larger pvt. Banks, led by business banking, rural loans and corporate advances. While management expects normalised costs near 50bps, asset quality remained resilient, with credit costs at 32bps. NIMs remained stable, backed by disciplined pricing and balance-sheet management, with margins anticipated to stay range-bound at 4.3-4.4%. The brokerage recommended a Purchase on the stock, with a target rate of Rs 1, 800.

While management maintained its 3% full-year domestic NIM guidance, sBI's NIM improvement was driven by lower cost of deposits. Asset quality remained at a multi-decade low, backed by disciplined underwriting and stronger collections. With robust credit expansion visibility, healthy corporate pipeline and benign credit costs, SBI is well positioned to sustain 1-1.1% RoA. The brokerage recommended a Purchase on the stock, with a target rate of Rs 1, 360.

Federal Bank's net interest margins improved in Q1, driven by lower cost of deposits and a favourable asset mix. Management expects margins to expand 5-6bps quarterly over the next 3-4 quarters. CASA momentum remains solid, backed by business banking and branch initiatives. While ECL transition impact is projected to remain limited, asset quality reached a decade-best. Notably, the brokerage recommended a Purchase on the stock, with a target rate of Rs 400.

Ujjivan Small Finance Bank maintained net interest margins at 8.5% in Q1, backed by lower funding costs and better-yielding secured segments. Management expects margins to remain stable despite modest cost pressures. Asset quality improved, prompting lower FY27 credit cost guidance of 0.9-1%. The bank targets 25% credit expansion, driven by portfolio diversification and climbed secured lending. Meanwhile, the brokerage recommended a Purchase on the stock, with a target rate of Rs 86.

Taken together, the developments around axis Direct's top bank picks after Q1 earnings point to a situation that is still moving, and the coming days should bring more clarity.