Tough Q2 ahead for banks but SBI, ICICI, Bandhan Bank remain CLSA’s top picks

Global brokerage firm CLSA said that the September quarter (Q2FY26) is likely to be the worst for banks in recent times, marked by sequential NIM (net interest margin) compression and asset-quality stress in certain segments.The brokerage expects loan growth to remain weak in September as well. However, post-September, it sees some green shoots emerging.

NIMs are expected to recover, aided by the Reserve Bank of India’s (RBI) Cash Reserve Ratio (CRR) cut and the repricing of term deposits.

CLSA estimates that the cost of deposits could decline by about 5 basis points per quarter over the next six to seven quarters. Asset-quality stress in unsecured retail loans should ease in the second half, but this improvement may be offset by pressure in other segments, particularly commercial vehicle (CV) loans.
The brokerage has cut its banking sector loan growth forecast to 10% from 13%.Its top picks are State Bank of India (SBI) and ICICI Bank in large caps, and Bandhan Bank in midcaps.

India’s banking sector delivered a measured performance in the first quarter of FY26, with clear divergences across private, mid-sized, and public sector banks.

Analysts characterise the current phase as a “recalibration” rather than distress, as lenders adjust to a softening interest-rate cycle and delayed deposit repricing.

Private banks posted a mixed performance, with a few reporting strong earnings, while most public sector banks showed signs of weakness. Margin contraction emerged as a common concern, driven largely by repo rate cuts. This pressure is expected to persist in the second quarter, as the full impact of rate adjustments is yet to be absorbed.

Banks, however, expect margin recovery from the third quarter onwards, supported by deposit repricing that should help stabilise NIMs.