Indian banks are entering the December quarter earnings season with renewed optimism after navigating a turbulent first half of FY26. Brokerages tracking the sector have identified three key positive trends: sustained credit growth, easing margin pressure, and stabilizing asset quality. These factors are expected to drive year-on-year profitability improvements, marking a potential turning point for the banking sector.

Across reports from Systematix, YES Securities, and Elara Capital, 10 banking stocks have emerged as consistent picks for the quarter ahead, spanning both private and public sector lenders.

Brokerage-Preferred Banking Stocks for Q3

Credit Growth Momentum Sustains Across Segments

The banking system continues to demonstrate robust lending growth, with advances expanding 12% year-on-year and 4.5% quarter-on-quarter as of mid-December 2025. This growth has been broad-based, with particular strength in micro and small enterprises, services, and retail loans.

Industrial credit growth has gained momentum, primarily driven by small businesses, while services lending has also accelerated. Retail credit remains steady with vehicle loans and personal loans showing faster growth rates. Notably, credit card lending has continued to slow, indicating a gradual cooling in unsecured retail stress.

Systematix Equities estimates loan growth of approximately 11.6% year-on-year for its coverage universe in Q3. Banks including HDFC Bank, Axis Bank, ICICI Bank, Bank of Baroda, Indian Bank, and SBI are expected to outperform the sector average. JM Financial anticipates strengthening credit growth momentum, led by retail, MSME, and services loans, with mid-sized banks and small finance banks showing relatively stronger sequential growth.

Deposit Challenges Persist but Liquidity Remains Manageable

While loan growth continues at a healthy pace, deposit mobilization remains challenging. System-level deposits grew 9.7% year-on-year in December, pushing the credit-deposit ratio above 81%. This dynamic has intensified competition for deposits, with banks increasingly relying on certificates of deposit and implementing selective rate increases.

Brokerages identify deposits as the key pressure point for the sector. Elara Capital highlights that slower growth in low-cost deposits and elevated credit-deposit ratios could limit liability repricing benefits in FY27. However, Q3 liquidity conditions remain comfortable, supported by surplus system liquidity and earlier CRR cuts. Larger banks with strong liability franchises are positioned favorably, with Elara noting that "liabilities could become assets in FY27."

Net Interest Margins Show Signs of Stabilization

Net interest margins are expected to remain largely stable in Q3, representing a significant improvement from the steady pressure experienced earlier in FY26. While yields on advances continue declining due to past repo rate cuts, banks are beginning to benefit from lower term deposit rates through lagged repricing of fixed-rate deposits.

Systematix expects margins to stay broadly flat sequentially, supported by CRR cuts and deposit repricing benefits. Most banks are likely to experience only marginal movements, with some reporting small declines and others showing modest improvements. JM Financial anticipates that CRR cut benefits should offset earlier rate-cut pressure in Q3, while the December repo cut impact is unlikely until Q4 or FY27.

Asset Quality Improvement and Earnings Recovery

Asset quality is showing clear signs of stabilization in Q3, with stress in unsecured lending, particularly microfinance, easing compared to earlier quarters. Slippages across most portfolios are expected to remain stable, though seasonal agricultural loan stress may cause mild increases.

YES Securities expects provisions to decline sequentially for several major banks, reflecting improved collections and reduced incremental stress. With loan growth sustaining, margins stabilizing, and credit costs improving, Q3 is positioned to mark an earnings turning point. Systematix anticipates year-on-year profitability improvements for most banks, reversing Q2 contractions. JM Financial estimates net interest income growth of approximately 4.7% year-on-year and pre-provision operating profit growth in low double digits.

According to YES Securities projections, SBI is expected to report 2% net profit growth on 7% net interest income growth, while HDFC Bank is anticipated to achieve a 12% year-on-year profit increase. The combination of sustained growth, margin defense, and asset quality stabilization positions the banking sector for a meaningful recovery in Q3 earnings.

Indian banks delivered healthy third-quarter business updates, with public sector banks and select mid-sized lenders driving robust credit growth while stress in microfinance and credit card segments continued to ease gradually. Banking research indicates the sector is tracking close to 12% year-on-year credit growth, with market experts viewing this as a clear indicator of economic recovery after a prolonged phase of single-digit system growth.

Strong Performance Across PSU and Mid-Sized Banks

Public sector banks posted particularly strong growth numbers in Q3, while mid-sized lenders including AU Bank and Equitas reported solid quarter-on-quarter loan expansion. This performance signals stabilization in unsecured portfolios after a prolonged period of asset quality stress. According to Sandip Sabharwal, founder of asksandipsabharwal.com, the double-digit loan growth across most large banks reflects rising economic activity.

"Credit growth drives the economy. What we are seeing now—double-digit growth for most large banks—is clearly indicative of an economic pickup," Sabharwal told ET Now.

Expert Preferences: Large Banks Over Smaller Lenders

Despite visible recovery in credit growth among small finance banks, market experts prefer sticking with large banks due to historical asset-quality risks. Sabharwal cautioned that aggressive lending by smaller institutions often leads to NPA issues later.

"Whenever smaller institutions grow too fast, NPAs tend to surface a couple of years later," Sabharwal noted, highlighting that system-wide gross NPAs have fallen to multi-year lows.

Microfinance Sector Shows Recovery Signs

The microfinance segment, which faced asset quality challenges through most of the year, is now showing signs of normalization. While loan books have contracted sequentially, collection efficiencies have improved significantly:

Month-on-month collection efficiency improvements indicate that the worst of the pain around slippages and collections is largely behind the sector, with portfolios expected to return to normal operating levels.

Net Interest Margins Near Cycle Bottom

The banking system appears close to the bottom of the net interest margin cycle, despite recent rate cuts. Among banks that have reported Q3 updates, Axis Bank and Kotak Mahindra Bank delivered strong numbers, while HDFC Bank posted stable but unspectacular growth.

A broader-based margin recovery is anticipated as funding costs begin to soften across the system, with IDFC First Bank expected to benefit particularly when interest rates trend lower.

Sector Outlook and Investment Strategy

Banking performance remains highly divergent across institutions, making stock selection critical for investors. The preference for large banks reflects their superior asset quality management and sustainable growth models. System-wide improvements in gross NPAs to multi-year lows strengthen the investment case for established players.

The third and fourth quarters typically represent strong periods for the banking industry, with expectations for moderation in slippage run rates as portfolios stabilize. Vehicle finance is experiencing recovery with strong disbursement growth, while retail credit growth across the system shows early signs of revival, supporting the broader economic pickup narrative.