Indian banks are entering a phase where loan growth is picking up. Also, liquidity conditions are improving, and bad loans remain under control. The global brokerage house Bernstein has turned its attention to some of India’s major banks. The brokerage house sees a significant upside potential in select private lenders, while the view on some public sector banks is more measured.

It sees the biggest upside in HDFC Bank and expects IndusInd Bank to trend lower from current levels. What is driving Bernstein’s view on the banking sector? Here’s a detailed analysis.

The Bernstein report noted that the bank credit growth accelerated sharply during the latest quarter. Growth was broad-based, with industrial, services and selected retail segments contributing to the recovery.

Deposit growth, however, continued to lag loan growth. At the same time, margin pressure appears to be easing. Lending and deposit rates have started to stabilise, while funding conditions have improved.

Bernstein said, “At an aggregate level, the sector appears to be in a sweet spot: loan growth is at a 4+ year high, margin risks are easing with improving system liquidity, and asset quality remains benign despite macro volatility.”

The brokerage report also highlighted to a changing balance between private sector banks (PVBs) and public sector banks (PSBs).

Private lenders have started narrowing the loan growth gap with PSBs. Their deposit growth has also remained stronger, helping them gain market share.

PSBs, meanwhile, have relied more on borrowings to fund credit growth. They continue to benefit from favourable loan mix changes, which have supported net interest income.

But Bernstein sees limited scope for PSBs to maintain their recent growth advantage.

It said, “PVBs are likely to continue narrowing the growth gap with PSBs, while the latter’s greater reliance on borrowings could weigh on relative margin performance.”

Among the banks tracked by Bernstein, HDFC Bank has the highest upside potential, as per their projections.

The brokerage has set a target price of Rs 1,150, implying a 56.7% upside from the reference price. ICICI Bank follows with a target of Rs 1,800 and 31.1% potential upside.

Kotak Mahindra Bank also features prominently, with a target price of Rs 500, suggesting 32.4% upside.

Axis Bank has a target of Rs 1,600, indicating 14.8% upside.

The view is more muted for State Bank of India (SBI), where Bernstein has a target of Rs 1,300, translating into just 2.6% upside. IndusInd Bank is the only stock in the list where the target implies a downside of 1.5%.

Bernstein expects the banking sector to maintain healthy growth in FY27. This is driven by strong liquidity and a recovery in nominal credit growth.

The margin outlook also remains stable. “Deposit repricing largely behind us and any rate hikes likely to provide an incremental boost to NIMs,” added the brokerage house report.

Asset quality is another support. Credit costs are expected to remain stable as bad loans remain contained.

However, risks have not disappeared.

Bernstein highlighted inflation, the trade deficit and geopolitical uncertainty as potential pressure points. A change in monetary policy could also slow credit growth later in the year.

The brokerage said, “Asset quality is expected to remain benign, supporting stable credit costs and earnings resilience.”

For investors, the key question now is whether improving credit growth can translate into sustained earnings growth.