Systematix Institutional Equities has released its latest outlook for the Indian banking sector, forecasting a sequential decline in net interest margins (NIMs) for its coverage universe in the second quarter of fiscal year 2027 (2QFY27). The firm expects an average sequential NIM contraction of approximately 7 basis points, primarily due to lower CASA (Current Account Savings Account) ratios and increased liquidity stemming from strong FCNR(B) flows.
Profitability Expected to Improve Despite NIM Pressure
Despite the anticipated pressure on NIMs, Systematix projects a robust 15% year-on-year growth in Profit After Tax (PAT) for its banking coverage universe, excluding IndusInd Bank. This improvement is attributed to strong advances growth and reduced provisioning costs. The firm covers 13 banks, with ICICI Bank, State Bank of India (SBI), and Kotak Mahindra Bank identified as its top picks.
Credit and Deposit Growth Dynamics
According to Systematix, banking system advances grew by 19% year-on-year in August 2026, a significant increase from 11% a year prior. Services remained the fastest-growing segment at 24.3%, propelled by strong growth in computer software (41.8%), NBFCs (37.5%), and aviation (32.1%). Industry credit growth also saw an uptick to 18.2%, with micro and small businesses expanding by 23%, medium enterprises by 31.8%, and large industries by 14.9%. Personal loans registered 16.9% growth, with notable increases in loans against jewellery (83.2%) and advances against fixed deposits (43.2%).
System deposits grew 17.3% year-on-year and 6.9% quarter-on-quarter as of September 15, 2026, largely driven by substantial FCNR(B) inflows totaling $132.9 billion by August 31, 2026. The system credit-deposit ratio moderated to 80.8%, with comfortable surplus liquidity conditions. However, the higher share of term deposits, influenced by FCNR(B) flows, is expected to elevate deposit costs and potentially weigh on yields from advances.
NIM Outlook for Individual Banks
- More than 10 bps sequential NIM decline: ICICI Bank, Kotak Mahindra Bank, Karur Vysya Bank.
- 5-10 bps contraction: Bank of India, Axis Bank, HDFC Bank, IndusInd Bank, Bank of Baroda.
- Broadly stable NIMs: Federal Bank, Union Bank.
Fee Income and Asset Quality Projections
Systematix anticipates fee income to rise in line with advances and overall business activity. HDFC Bank, SBI, Bank of India, Bank of Maharashtra, and Union Bank of India are expected to report fee income growth surpassing their advances growth. Conversely, Federal Bank, ICICI Bank, and IndusInd Bank may see fee income lag advances sequentially. Treasury income is projected to decline across most banks due to higher G-Sec yields impacting trading gains.
Asset quality is expected to remain robust, with stable or lower credit costs for Axis Bank, ICICI Bank, HDFC Bank, Union Bank, Bank of Maharashtra, Bank of India, IndusInd Bank, Kotak Mahindra Bank, and Indian Bank. SBI, however, may report higher credit costs as it potentially utilizes one-off gains to bolster provision buffers, while Bank of Baroda might see increased credit costs due to a low base in 1QFY27.
Ratings and Price Targets from Systematix
Systematix has issued the following ratings and target prices:
- Buy Ratings:
- ICICI Bank: Rs 1,700
- State Bank of India (SBI): Rs 1,220
- Kotak Mahindra Bank: Rs 515
- Bank of India: Rs 165
- Axis Bank: Rs 1,500
- HDFC Bank: Rs 870
- Karur Vysya Bank: Rs 395
- Indian Bank: Rs 980
- Bank of Maharashtra: Rs 98
- Union Bank of India: Rs 200
- Bank of Baroda: Rs 275
- Hold Ratings:
- Federal Bank: Rs 350
- IndusInd Bank: Rs 950