Motilal Oswal is betting big on these 4 bank stocks: Find out why?

By Admin

06 Jun, 2025

Motilal Oswal, one of India’s most prominent brokerages, has zeroed in on four major bank stocks that it believes are set to outperform despite current headwinds in the financial sector. In its latest sector note, the brokerage shares insights into the evolving dynamics of the banking space and explains why it sees potential in these specific names. Let’s break down what’s happening in the sector and why Motilal Oswal is optimistic about these lenders.

Top 4 Bank Picks by Motilal Oswal

The brokerage’s latest report puts the spotlight on ICICI Bank, HDFC Bank, State Bank of India (SBI), and AU Small Finance Bank. These banks are considered resilient and well-prepared to navigate challenges such as margin pressure and slowing credit growth. Despite a complex macro environment, Motilal Oswal believes these institutions have the right mix of operational strength, asset quality, and strategic focus to deliver returns in the medium to long term.

Lending Rates Are Dropping – What It Means

According to the report, the Weighted Average Lending Rate (WALR) on fresh loans declined by 9 basis points (bps) month-on-month in April 2025. This decline followed a 5 bps drop in March, highlighting a trend driven primarily by the Reserve Bank of India’s rate cuts rather than competitive pressures. Notably, Public Sector Banks (PSBs) recorded a 20 bps decline, while Private Banks (PVBs) witnessed a sharper 24 bps fall.

Interestingly, even as rates fall, banks are maintaining a strong premium over the repo rate. The report mentions that the premium has risen to 4.08% for private banks and 2.46% for PSBs, the highest since August 2022. This demonstrates that despite lower rates, banks are preserving some pricing power.

Credit Growth Is Slowing – But It’s Strategic

As of May 16, 2025, system-wide credit growth had slowed to 9.8%. While this might seem alarming on the surface, Motilal Oswal sees it as a sign of prudence. Banks are exercising caution and focusing more on asset quality than on aggressive disbursements.

Retail loans are now largely going to high-credit-score and well-documented borrowers, and corporate lending is expected to stay muted in FY26 as banks prioritize portfolio stability over growth. This conservative approach helps banks maintain healthy balance sheets even amid a challenging environment.

Deposit Rates Hold Firm – Intense Competition Ahead

In contrast to falling lending rates, deposit rates have remained mostly steady. The Weighted Average Term Deposit Rate (WATDR) stayed flat at 7.01% between January and April 2025. This lack of decline reflects growing competition among banks to attract deposits.

With deposit growth hovering at 10-12%, the Credit-Deposit (CD) ratio remains high, putting liquidity under pressure. In this scenario, banks need to manage funding costs strategically to protect their profit margins.

NIM Pressure in H1FY26, But Relief May Follow

With lending rates falling faster than deposit rates, Net Interest Margins (NIMs) are expected to face pressure in the first half of FY26. However, there’s a silver lining. As deposit re-pricing catches up, the brokerage expects some relief in the second half of the financial year.

Motilal Oswal estimates that NIMs will trend downward initially, but a lagged reduction in deposit rates could help margins recover later. This delayed pass-through is likely to be crucial for the earnings trajectory of banks in FY26.

Conclusion: Resilience Over Aggression

Despite short-term challenges, Motilal Oswal’s confidence in ICICI Bank, HDFC Bank, SBI, and AU Small Finance Bank stems from their robust fundamentals, focus on quality lending, and strong competitive positioning. While the sector faces near-term headwinds, these banks are seen as long-term winners capable of managing risks and capitalizing on structural opportunities.