Indian banks are poised for a robust performance in the first quarter of fiscal year 2027 (Q1FY27), with profit after tax expected to climb approximately 15% year-on-year. This outlook, provided by ICICI Securities, suggests stable asset quality across the sector, even as net interest margins (NIMs) are anticipated to face headwinds.
Strong Loan Growth Counteracts NIM Pressure
According to the brokerage, systemic credit growth has surged to about 17.7% year-on-year, driven primarily by wholesale segments. Gold loans have shown exceptional growth, exceeding 100% annually, with large industry and NBFC lending also contributing significantly. However, core retail growth remains subdued, with credit card growth at 1% and personal loans at 12-13%.
Despite the strong loan book expansion, net interest margins are forecast to remain under pressure. This is attributed to elevated bulk deposit costs, adverse agricultural seasonality, and day-count impacts. Nevertheless, net interest income growth is projected to improve to around 10% year-on-year. Treasury income is expected to be strong quarter-on-quarter but weaker on an annual basis, while operating expenses are likely to stay controlled, particularly for larger banks benefiting from risk-based DICGC premiums.
Asset Quality and Key Monitorables
Asset quality is generally seen as stable, though usual agricultural seasonality may impact some large private banks. SME slippages, however, are expected to ease following a challenging Q4. MFI slippages could decline for IndusInd Bank, IDFC First Bank, and RBL Bank, while Bandhan Bank might see a slight sequential uptick.
Key factors to monitor include SMA (Special Mention Accounts) trends, liquidity coverage ratio (LCR) post-April 2026 regulatory changes for Public Sector Banks (PSBs), and the traction in FCNR(B) deposits and ECLGS 5.0 over the coming months.
ICICI Securities' Stock Recommendations
ICICI Securities has issued 'buy' ratings for several banking stocks ahead of their Q1FY27 results. These include:
- Axis Bank
- Bandhan Bank
- City Union Bank
- DCB Bank
- HDFC First Bank
- Karur Vysya Bank
- Kotak Mahindra Bank
- RBL Bank
- South Indian Bank
Federal Bank received an 'add' rating, while IndusInd Bank and YES Bank were assigned 'hold' ratings. The brokerage emphasizes that the ability of banks to protect NIMs while accelerating loan growth will be a crucial differentiator throughout FY27.