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Informist, Tuesday, Dec. 2, 2025

NEW DELHI – Global brokerage Nomura believes that the downcycle for net interest margin in Indian banking sector has bottomed out in Jul-Sept period and expects it to gradually improve, led by a re-pricing of term deposits. "We believe the India banking sector is entering a decisive profitability inflection point after several quarters of net interest margin compression driven by the rate-cutting cycle and elevated credit costs," Nomura Financial Advisory and Securities India said in a report.

Margins were lower across the banking sector in the September quarter following the 100-bps reduction in the policy repo rate by the Reserve Bank of India's Monetary Policy Committee between February and June. "Moderating stress in the unsecured retail and microfinance institution segments should result in lower credit costs going ahead," the report said.

The report by Research Analysts Ankit Bihani and Shreyas Pimple said that the brokerage expects banking sector return on assets to expand by around 15 basis points over 2025-26 (Apr-Mar) to FY28. "System credit growth is likely to accelerate to 13%/14% year-on-year by FY26F/FY27F led by favorable fiscal and monetary policies," the report said. "We expect the sector to deliver a strong earnings compound annual growth rate of 16% over FY26-28F. Sector valuation at 2.1x one-year forward book value per share looks inexpensive, and improving return of assets and strong earning per share CAGR make a compelling case for re-rating of the sector, in our view."

The 26 banks in Nifty 200 segment reported total net profit of INR 926 billion in Jul-Sept, up just 2% on year. The largest bank in the country, State Bank of India, reported a net profit of INR 201.60 billion for the September quarter, up 10% on year and 5.2% on quarter. Meanwhile, second-largest lender HDFC Bank's net profit for the September quarter rose 11% on year and marginally on quarter to INR 186.41 billion.

Nomura said delinquency trends in the key unsecured categories are now showing signs of improvement and banks are gradually regaining confidence to step up growth in these segments. "Besides, conducive policies – such as repo-rate, tax (relief), CRR, and GST reductions – should aid in providing a boost to system credit growth," it said.

Nomura said it prefers banks with stronger return profiles, lower asset quality risks and superior liability franchise. "Within private banks, we like Axis Bank – led by improving loan growth/asset quality outlook and attractive valuations and ICICI Bank – as a preferred compounding play, and the sector leader across parameters. HDFC Bank, however, needs to demonstrate stronger deposit mobilisation to deliver a sustained recovery in loan growth. Among public sector banks, while the space offers value, we favor SBI over Bank of Baroda owing to its better core-profitability profile," the report said.

In the mid-tier segment, Nomura prefers IndusInd Bank as a potential turnaround play, while it remains Neutral on AU Small Finance Bank. "We also have a Neutral rating on Bandhan Bank as valuation comfort is balanced by asset quality concerns," it said. Subdued loan growth, aggressive rate cuts, asset quality deterioration are the key risks to the growth in the banking sector, the report said.  End

Reported by Sagar Sen

Edited by Deepshikha Bhardwaj

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