News · BFSI
Frontline private sector banks and State Bank of India are seen as better placed to benefit from the current rising interest rate cycle, backed by favourable loan mix and shifting funding costs.
✦ AI SUMMARY 30-second read
- Banks under coverage posted 20 per cent year-on-year earnings growth in Q2FY27, with net interest income up approximately 15 per cent.
- Public sector banks recorded around 20 per cent earnings growth; private banks posted about 25 per cent, though NIM trends were mixed.
- Kotak Institutional Equities favours frontline private lenders, SBI and Bandhan Bank; it continues to avoid regional banks.
Why it matters: Rising rates and lower funding costs could lift net interest margins at India's largest banks, shaping near-term earnings across the sector.
This summary was generated by AI. Editors may review and update it.
Frontline private sector banks and State Bank of India are better positioned than peers to capitalise on the ongoing rising interest rate cycle, according to an analysis by Kotak Institutional Equities. Their advantage stems from a favourable loan mix, relatively well-placed liability franchises and an ongoing shift towards lower-cost funding.
Net interest income is expected to grow further from current levels, even if headline loan growth moderates as bank portfolios gradually move away from corporate lending. The replacement of high-cost wholesale funding with lower-cost term deposits, including through the FCNR route, is seen as an additional support to margins.
What was reported
Banks under the brokerage's coverage reported 20 per cent year-on-year earnings growth in Q2FY27. Operating profit grew around 15 per cent, provisions fell 25 per cent, and net interest income rose approximately 15 per cent.
Public sector banks recorded around 20 per cent earnings growth for the period, while private banks posted growth of about 25 per cent. Net interest margin trends, however, were mixed: margins remained stable or improved at public sector lenders, whereas most private banks reported a decline, partly attributed to the impact of FCNR deposits.
Loan growth remained strong across both categories, while treasury income contributions declined sequentially.
Loan mix and funding costs
The brokerage notes that some recent demand for corporate credit appears linked to higher working-capital requirements, as businesses face elongated cash-conversion cycles and inflation. A gradual shift away from corporate lending could support net interest margins, even if it results in some moderation in headline loan growth.
On the funding side, banks are replacing expensive wholesale borrowings with lower-cost term deposits, and the rate cycle could provide an additional tailwind. The magnitude and sustainability of any net interest margin expansion will, however, depend on the duration and intensity of the rate cycle, as well as the prevailing deposit and funding environment.
Asset quality and valuation outlook
The brokerage expects the asset-quality cycle to remain favourable in the near term, supported by lower slippages and benign credit costs. It sees limited near-term asset-quality risk in banks' gold-loan portfolios, particularly at larger lenders whose customer mix skews towards larger-ticket borrowers with relatively lower risk profiles.
Headwinds from fee income and operating expenses are expected to be significantly lower for frontline banks than for their peers. Despite a sharp rally in frontline private banks and SBI over the past few weeks, the brokerage considers their valuations attractive, noting that the re-rating followed a prior period of underperformance or absolute share-price declines.
The brokerage remains watchful for opportunities among mid-tier banks but finds their prospective return profiles make it harder to turn constructive. It continues to avoid regional banks because of higher gold-loan exposure and relatively expensive valuations. Among banks with a higher share of microfinance institution exposure, it favours Bandhan Bank.
