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JM Financial flags weak Q1 for banks; here are its top picks

JM Financial flags weak Q1 for banks; here are its top picks

"The decline is likely to be driven by moderating loan growth, a 30bps (basis points) YoY compression in NIMs, weak fee income growth and elevated credit costs, partially offset by strong trading gains," JM Financial stated.

Prashun Talukdar
Prashun Talukdar
  • Updated Jul 7, 2025 6:17 PM IST
JM Financial flags weak Q1 for banks; here are its top picksIn terms of stock preferences, JM Financial has expressed a clear tilt towards large private sector banks.

JM Financial Institutional Securities expects another weak earnings season for Indian banks in the first quarter of FY26, projecting an 8 per cent year-on-year (YoY) decline in profit after tax (PAT) for its coverage universe. This follows a 6 per cent YoY PAT decline seen in the fourth quarter of FY25. "The decline is likely to be driven by moderating loan growth, a 30bps (basis points) YoY compression in NIMs, weak fee income growth and elevated credit costs, partially offset by strong trading gains," it stated.

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As of June 13, 2025, system-wide credit growth stood at around 10 per cent YoY, showing visible signs of slowdown across lending segments. JM Financial estimates loan growth for its covered banks at 10.8 per cent in Q1 FY26, down from 12.3 per cent in Q4 FY25. Deposit growth has also remained subdued at 10.4 per cent YoY, with Current Account and Savings Account (CASA) deposits growing even slower.

With the Reserve Bank of India (RBI) front-loading rate cuts totalling 100 bps in this cycle, floating-rate loans linked to external benchmarks have quickly repriced, resulting in margin compression. JM Financial expects NIMs to decline 30 bps YoY, which, along with slower loan growth, will keep Net Interest Income (NII) under pressure -- likely growing just 2 per cent YoY for covered banks.

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Asset quality, while broadly stable, remains a concern in certain unsecured segments. JM Financial expects slippages in secured segments to be manageable but notes elevated credit costs, particularly for mid-sized banks. Consequently, market attention will be sharply focused on management commentary around unsecured loans such as personal loans, credit cards, and microfinance (MFI) exposures.

In terms of stock preferences, JM Financial has expressed a clear tilt towards large private sector banks. "In this environment, we prefer large private banks over mid-sized and PSU banks," the broking firm said. Axis Bank, ICICI Bank, and SBI are its top picks in the private sector, while SBI and Bank of Baroda (BoB) stand out among public lenders. In the mid-sized banking space, City Union Bank (CUBK) and DCB Bank are preferred.

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With earnings under pressure and margins likely to compress, the brokerage's recommendations highlight a flight to quality and size in an increasingly challenging environment.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Published on: Jul 7, 2025 5:21 PM IST
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