Nomura, which met 25 institutional investors in Singapore, Hong Kong and Kuala Lumpur (Malaysia), as part of its analyst marketing trip for India banks, said foreign institutions showed inclination towards large private banks, led by superior earnings visibility, strong provision buffers and benign valuations. They are cautious on PSU banks, Nomura said as it continued to prefer Kotak Mahindra Bank Ltd (KMB), Axis Bank Ltd, and ICICI Bank Ltd among large banks; and Federal Bank, IndusInd Bank Ltd and IDFC First Bank within the mid-tier banking space. 

Nomura said FIIs were most constructive on ICICI Bank, where franchise quality and earnings consistency command premium interest. HDFC Bank Ltd at estimated FY28 book value of 1.5 times is seen as compelling on valuations, but the Chairman exit and MD & CEO renewal uncertainty are keeping investors cautious, it noted. 

"Incrementally, we found higher interest in Axis Bank (Buy) and KMB (Buy), with inexpensive valuations and a recovery in asset quality," Nomura said.

On PSU banks, the sentiment was uniformly cautious, Nomura said noting that it saw a sharp shift from more mixed positioning when it first published its rotation note. 

"The concerns are clear: soft NIMs, loan growth pressure, moderate-to-sharp LCR buffer erosion in 4Q, and a higher ECL burden relative to large private peers. Within mid-tier banks, the preference was toward Federal Bank (Buy) – consistent delivery post Mr. Manian taking charge, and IDFCFB (Buy), which posted strong 4Q numbers despite fraud-related impact," it said.

The credit growth picked up to 16 per cent YoY in FY26 from 10 percent in May 2025, but the deposit growth has lagged at 12-13 per cent YoY.

Nomura said foreign investors see downside to credit growth if this gap persists. Prolonged deposit underperformance risks are intensifying liability competition, forcing TD rate hikes and heavier CD (certificate of deposit) issuance, negating the repricing tailwind underpinning the NIM recovery story, it said quoting investors.

"4Q results have largely validated this concern, with NIMs disappointing across our coverage universe – consistent with our recent liquidity note flagging structural credit- deposit imbalances," Nomura said.

Overall, it said FIIs remained cautious on India as the West Asia conflict keeps crude elevated and macro tail risks alive. A wider current account deficit (CAD), and rupee pressure is weighing on the sentiment, with ouflows reflecting selective trimming rather than fresh conviction buying, Nomura said.