Mumbai, July 1 -- India's banking sector is entering a more constructive phase, with future stock re-rating likely to be driven by improving profitability rather than balance sheet repair, according to a report by Kotak Institutional Equities.

The brokerage said the investment case for banks remains intact despite recent boardroom and management changes at HDFC Bank, Axis Bank and Bandhan Bank, stressing that these developments do not alter the sector's underlying fundamentals, which it believes has entered a more favourable phase.

"We are in a more constructive phase of the cycle, where re-rating is increasingly likely to be driven by improving profitability rather than balance sheet repair," the report said.

Kotak added that the next...