Indian financial stocks have had a difficult run thus far. But the global brokerage house, Jefferies sees the scope of a possible turnaround. This is backed by improving earnings growth and a potentially more favourable outlook for Indian banks.

According to the Jefferies report, Indian financial stocks could benefit as the earnings growth gap with global peers starts to reverse.

The brokerage house has recommended ‘Buy’ rating on 10 stocks and sees upside of up to 40% in select counters. The list includes both private sector banks and public sector ones (PSUs). The brokerage house has also identified its top picks in the financial sector.

Here’s a detailed look at the standout picks and the investment rationale for them –

Jefferies has identified ICICI Bank, State Bank of India (SBI), Axis Bank, AU Small Finance Bank and IndusInd Bank as its preferred names in the banking space.

Among large banks, they have set a target price of Rs 1,750 for ICICI Bank, implying an upside of 26% from the current market price. The target for SBI is Rs 1,320, indicating 32% potential upside from the current levels. For Axis Bank, Jefferies sees an upside potential of 37%, with a target price of Rs 1,700.

In the small and midcap banking space, Jefferies prefers AU Small Finance Bank and IndusInd Bank. The brokerage has set a target of Rs 1,270 for AU Small Finance Bank, suggesting 20% upside. IndusInd Bank has a target of Rs 1,250, implying 25% upside.

“ICICI, SBI, Axis, AU Bank and IndusInd Bank are top picks,” added the brokerage house in its report.

The brokerage believes the earnings growth picture for Indian financials could improve significantly over the next two years.

“Consensus earnings estimates for global financials indicate an upgrade of 6-8% during 9M2026 and 2-3% during the recent quarter,” added Jefferies report.

The performance gap with global financial stocks has been significant. According to the brokerage report, the MSCI All Country World Financial Index has gained 46% in US dollar terms over the past two years. Indian financials, meanwhile, have declined 9% during the same period.

The difference becomes clearer when individual markets are compared. US financials rose 30%, while the United Kingdom gained 90%, Japan 96% and China 68%.

Jefferies pointed to falling interest rates, which put pressure on net interest margins, along with pockets of asset-quality stress.

But the outlook could change. The brokerage expects earnings growth for Indian financials to rise from 7% in FY26 to 9% in FY27 and potentially 14% in FY28.

Beyond its top picks, Jefferies has a ‘Buy’ rating on HDFC Bank, Kotak Mahindra Bank, IDFC First Bank, Bandhan Bank and Punjab National Bank.

The target price for HDFC Bank has been set at Rs 880, suggesting 28% upside potential. Kotak Mahindra Bank has a target of Rs 460, indicating 11% upside potential from its current market price.

For IDFC First Bank, Jefferies has a target of Rs 96, implying 12% upside, while Bandhan Bank has the potential gain on Jefferies’ list at 40%, with a target price of Rs 240.

Punjab National Bank has a target of Rs 130, suggesting 12% upside potential.

The brokerage has a different view on Bank of Baroda. It has assigned a ‘Hold’ rating with a target price of Rs 275, indicating 17% potential upside.

Jefferies believes the earnings upgrade cycle could become an important trigger for Indian financial stocks.

“Normalisation of upgrade cycle and clarity on large-cap CEOs will be catalysts,” as per the brokerage report.

The brokerage also expects management changes at some major banks to remain important. HDFC Bank and Kotak Mahindra Bank are among those facing upcoming leadership changes, while Federal Bank, Bandhan Bank, IDFC First Bank and Axis Bank could also see changes or renewals over the next one to two years.