Kotak Bank added, Axis dropped; ICICI, SBI, Federal Bank top Nomura's picks

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Kotak Mahindra Bank Ltd and excluding Axis Bank Ltd. Now, Nomura's top large banks include ICICI Bank, State Bank of India, and Kotak Mahindra Bank, all rated 'Buy'.

Among midsize banks, Nomura prefers Federal Bank, also rated 'Buy'.The brokerage has analyzed the Reserve Bank of India (RBI)’s money supply data to understand the reasons behind the lagging deposit growth in the banking system over the past two years. While bank commercial credit, including corporate bonds, grew by 14% and 16% year-on-year in FY23 and FY24 respectively, system deposit growth lagged at 9 percent and 12 percent year-on-year, putting pressure on system liquidity.Generally, credit creates deposits, and over the long term, both tend to grow at similar rates.

However, this persistent divergence is concerning. Nomura's analysis indicates that the primary reasons for the slower deposit creation in FY24 were lower net credit to the government from the banking system and higher net non-monetary liabilities of banks.Looking ahead to FY25, the brokerage believes that the positive impact on deposits from the JP Morgan bond index inclusion could be counterbalanced by a normal increase in currency circulation, which was not seen in FY24 due to the RBI's ₹2,000 note withdrawal.Moreover, for a sustainable increase in deposit growth beyond our base case of 13 percent year-on-year (YoY) for FY25, there would need to be a significant rise in bank credit to the government or substantial forex asset purchases by the RBI.