Q4 impact: Bank stocks slump up to 32% in 3 months, but brokerages bet on SBI, HDFC Bank, 6 more stocks. Check why

Banking stocks have come under sharp pressure over the past three months, with most lenders underperforming the benchmark Nifty 50 amid a challenging macro backdrop marked by sustained foreign institutional investor (FII) outflows, escalating geopolitical tensions, and a surge in energy prices.

The benchmark index declined 16% during the period, but several banking names fared significantly worse. IDFC First Bank emerged as the biggest laggard, plunging 32%, followed by HDFC Bank, which fell 27%. YES Bank dropped 22%, while PSU lenders such as Canara Bank and Bank of Baroda (BoB) declined 20% each. Among private peers, Kotak Mahindra Bank also slipped 20%, highlighting broad-based weakness across the sector.

Mid-tier and smaller lenders were not spared either. Punjab National Bank (PNB) fell 19%, while IndusInd Bank and AU Small Finance Bank declined 16% each. Even relatively resilient names like ICICI Bank and Axis Bank dropped 12% and 8%, respectively. Federal Bank managed to limit losses to 3%, while State Bank of India stood out as the most defensive large-cap, declining just 1%.

The underperformance comes amid persistent FII selling, which has disproportionately impacted financials due to their heavy weightage in benchmark indices. At the same time, the escalation of the Iran-Israel conflict has triggered a spike in crude oil prices, raising concerns over inflation and delaying expectations of interest rate cuts by global central banks.

Higher energy prices and sticky inflation expectations have clouded the outlook for interest rate cycles, which in turn has weighed on banking stocks. Elevated bond yields and tightening liquidity conditions have further dampened sentiment towards the sector, even as underlying fundamentals such as asset quality and credit growth remain relatively stable.

Uncovering the underperformance, Abhinav Tiwari, Research Analyst at Bonanza, said the Street remains worried about future profitability of the sector rather than current business growth. In his view, investors are focusing on rising funding costs.

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“Smaller private banks such as IDFC First Bank, Bandhan Bank and RBL Bank have increased lending rates because deposits are becoming expensive and they are relying more on bulk deposits and certificates of deposit for funding. This means the cost of raising money is rising faster than loan yields, which may put pressure on margins in coming quarters,” Tiwari said.

Moreover, the Reserve Bank of India’s (RBI) most recent diktat to lenders to limit their net open positions in INR to $100 million at the end of each business day has had an unsettling near-term impact.

“RBI’s $100 million cap on forex positions may reduce treasury flexibility and lead to temporary mark-to-market losses, affecting short-term treasury income for some banks,” the Bonanza analyst said.

Apart from this, the Iran-Israel war has pushed back hopes of any rate cut by global central banks this year. The US Federal Reserve, in its March monetary policy, indicated a single 25 bps cut later this year, compared with earlier expectations of a couple of revisions.

RBI, which will begin its three-day monetary policy meeting starting April 6, is also expected to leave rates unchanged at 5.25%.

“The market is also reducing expectations of an early rate cut by RBI because inflation risk has increased due to rising global energy prices and war-related uncertainty. If crude oil remains high, inflation and CAD may rise, keeping rates elevated for longer,” Tiwari added.

Q4 expectations and outlook

With nearly a week to go before the earnings season starts, investor expectations will now rest on the results from these banks.

Brokerage Motilal Oswal Financial Services (MOFSL) expects momentum to remain robust in bank counters, supported by liquidity buffers and consumption-led recovery following GST rationalisation.

For 4QFY26E, MOFSL estimates net interest income (NII) for its coverage universe to improve 7.4% YoY and 3.2% quarter-on-quarter. The overall YoY growth in profit after tax (PAT) is seen at 2.1%, while a sequential decline of 5.3% is expected. PAT for MOFSL’s coverage could grow 7% YoY and 0.7% QoQ.

Net interest margins (NIMs) outcome in 4Q is expected to be divergent, with large private banks like ICICI and HDFC expected to report flat margins, while Axis and Kotak could report a decline. Meanwhile, mid-sized banks are better placed, with AU Small Finance Bank, Bandhan Bank, Equitas Small Finance Bank and IDFC First Bank expected to report NIM expansion.

Systematic credit growth for the sector in the January-March quarter stood at 14% (13% YTD), MOFSL said, pegging system-wide deposit growth at 10.8% year-on-year, though faster credit growth has led to a spike in the CD ratio to 83%.

Seasonally a strong quarter, Q4 this time is expected to be softer due to ongoing uncertainty, Elara Capital said in a note. Banks are likely to report mixed performance with a cautious tone, making guidance for H1FY27 critical, it said.

Key trends include steady loan and deposit growth, margin pressure from rising funding costs, weaker treasury income impacting profitability, and seasonally lower credit costs offering some support.

“Overall, while Q4 may be mixed, FY27 outlook will be closely watched, with potential downward earnings revisions. Among lenders, ICICI Bank, SBI and AU Small Finance Bank are preferred picks,” the brokerage said.

Stocks to buy

Among banks, MOFSL has picked two Nifty stocks, SBI and ICICI Bank.

Elara Capital’s recommendations:

Buy HDFC Bank | Target: Rs 1,147 | Upside: 57%
Buy ICICI Bank | Target: Rs 1,783 | Upside: 48%
Buy Axis Bank | Target: Rs 1,555 | Upside: 34%
Buy Kotak Bank | Target: Rs 511 | Upside: 45%
Buy City Union Bank | Target: Rs 335 | Upside: 40%
Buy DCB Bank | Target: Rs 214 | Upside: 35%
Buy Bandhan Bank | Target: Rs 186 | Upside: 32%
Buy Ujjivan | Target: Rs 72 | Upside: 43%
Buy Equitas | Target: Rs 83 | Upside: 80%

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)