India's banking sector is anticipated to demonstrate robust growth, with credit expansion forecasted at 16.5 percent year-on-year by fiscal year 2027. This optimistic outlook, provided by Motilal Oswal Financial Services, is significantly supported by an influx of $133 billion in Foreign Currency Non-Resident (Bank) deposits, which surpassed initial market expectations and boosted business growth in the second quarter of FY27.
Credit Growth and FCNR(B) Impact
The FCNR(B) inflows played a crucial role in enabling banks to expand their credit portfolios. ICICI Bank Ltd secured the largest share of these deposits at 13.4 percent, while RBL Bank Ltd mobilized an impressive 26 percent of its outstanding deposit base from FCNR(B) accounts. In contrast, public sector banks generally attracted a lower proportion, ranging from 2 percent to 5 percent.
Motilal Oswal noted that Kotak Mahindra Bank Ltd and RBL Bank exhibited the lowest leverage against these FCNR(B) deposits, indicating substantial room to deploy these funds into higher-yielding assets. Most public sector banks, along with YES Bank Ltd and IDFC First Bank Ltd, showed leverage levels between 70 percent and 86 percent, with the aggregate sector leverage around 58 percent.
Excluding FCNR(B) related loans, credit growth for disclosing banks stood at 18 percent year-on-year and 4 percent quarter-on-quarter. Deposit growth, excluding FCNR(B) deposits, was 12 percent and 2.5 percent respectively. The effective credit-to-deposit ratio, excluding leverage against these deposits, was 83.7 percent.
Margin Trends and Earnings Projections
Net interest margins (NIMs) are expected to see a broad recovery from the fourth quarter of FY27, as surplus liquidity is deployed and rate transmission mechanisms support revenue generation. Private banks experienced sharper margin contractions due to a higher proportion of mobilized deposits and greater leverage. For instance, Kotak Bank's margins contracted by 22 basis points, IDFC First by 38 basis points, and Equitas Small Finance Bank by 55 basis points. Conversely, public sector banks generally observed a positive impact on their margins.
Motilal Oswal projects banking sector earnings to grow at a compound annual growth rate (CAGR) of approximately 17 percent over FY26-28, primarily driven by a similar rise in net interest income. Private banks are anticipated to outperform, with earnings growth projected around 22 percent, compared to approximately 11 percent for public sector banks.
Key Bank Recommendations and Target Prices
Motilal Oswal Financial Services has updated its target prices and ratings for several prominent Indian banks. Their top picks include:
- ICICI Bank Ltd: Target Price Rs 1,750 (Buy)
- HDFC Bank Ltd: Target Price Rs 925 (Buy)
- Kotak Mahindra Bank: Target Price Rs 500 (Buy)
- AU Small Finance Bank: Target Price Rs 1,275 (Buy)
- State Bank of India: Target Price Rs 1,225 (Buy)
Other Notable Recommendations:
- Buy Ratings: Federal Bank (Rs 385), DCB Bank (Rs 245), IDFC First Bank (Rs 100), Equitas Small Finance Bank (Rs 75), RBL Bank (Rs 485), PNB (Rs 140), Canara Bank (Rs 160), Indian Bank (Rs 1,025).
- Neutral Ratings: Bank of Baroda Ltd (Rs 270), Union Bank (Rs 200), Axis Bank (Rs 1,475), Bandhan Bank (Rs 175), IndusInd Bank Ltd (Rs 1,050).
Disclaimer: This report provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.