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Informist, Tuesday, Mar. 24, 2026

 

MUMBAI – Brokerage Nomura has trimmed its net interest margin projections for 2026-27 (Apr-Mar) and FY28 by 3-12 basis points for multiple banks under its coverage. The cut in net interest margin estimates were driven by moderating current account and savings account ratios, against expectations of stability earlier and amid higher wholesale funding costs despite policy easing, the brokerage said in a report dated Sunday. It has also cut its target prices across the sector by 2-24%.

 

Together, the moderating CASA ratios and higher wholesale funding costs will partly offset the benefit of term deposit repricing at lower rates, meaning that the recovery in net interest margin will be delayed than previously modelled, Nomura said. The brokerage now expects an improvemnet in net interest margins of most banks to be delayed to the second half of FY27, as against the earlier expectation of a recovery in the March quarter. 

 

The brokerage pointed out that the improvement in system credit growth from 10% to 14.9% year-on-year since mid 2025 "has been built on borrowed time," funded by banks drawing down liquidity buffers rather than by "strong deposit mobilisation." This pushed the system credit-deposit ratio to 82% from a 10-year average of 75%, Nomura said. 

 

"Liquidity funded growth has a ceiling," the report warned, arguing that as buffers moderate, sustaining credit growth will require deposit growth to pick up. However, the two key enablers of deposit creation--government spending and foreign exchange inflows--are both currently running below what is needed. Meanwhile, funding costs are rising despite policy easing, as the structural gap between credit and deposit growth keeps marginal funding costs elevated, Nomura noted.

 

"We find that banks with higher residual liquidity buffers and stronger liability franchises are best placed in this environment," Nomura said, adding that Kotak Mahindra Bank stood out on both counts. It has upgraded its recommendation on the stock to buy from neutral, but cut the target price by 3% to INR 445 per share. The bank's liability franchise is relatively weaker compared to its peers, it offers the strongest earnings compounded annual growth of 24% over FY26-FY28, and trades at an attractive valuation, Noumra added. The brokerage has also named ICICI Bank as its preferred compounder, with a sector-leading profitability profile.

 

With deposit growth unlikely to accelerate materially in the near term, the Reserve Bank of India is likely to continue providing liquidity support through open market purchases and potential cuts in cash reserve ratio or statutory liquidity ratio. However, this will benefit banks that still have buffer to deploy; banks with liquidity coverage ratio already close to around 115% have exhausted their extra cushion and face a more challenging path to sustaining loan growth momentum, it said. In its view, Bandhan Bank, State Bank of India, Kotak Mhindra Bank, and ICICI Bank stand out with the most meaningful near-term growth capacity without needing incremental deposit, while HDFC bank, IDFC FIRST Bank, Axis bank have virtually no such headroom and their near-term growth will be contingent on deposit mobilisation funding. 

 

The earnings per share estimate for IDFC FIRST Bank saw a sharp cut as the brokerage now factors in the impact of the recent fraud in the March quarter, built in lower net interest margin over FY27-FY28, and lower deposit growth for FY26. The brokerage has also cut the stock's target price by 24%, the most among its peers.  End

 

Reported by Arya S. Biju

Edited by Avishek Dutta

 

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