Indian Banks Poised for Growth Amid NIM Recovery and Credit Demand

Indian banks are projected to exhibit stronger credit growth and stable asset quality, with key factors such as net interest margin recovery, deposit costs, and retail loan growth shaping the sector's earnings outlook. Equirus highlights the importance of sustainable growth and the potential impact of corporate capital expenditure.

In the coming quarters, Indian banks are set to experience robust credit growth and stable asset quality, bolstered by recovery factors like net interest margins (NIMs), according to broker Equirus. The firm emphasized that stable deposit costs and retail loan growth are pivotal for the banking sector's earnings outlook.

With the first set of Q1 FY27 banking results behind them, Equirus's mid-quarter review reveals that as banks enter the second quarter, asset quality and capital remain strong, while deposit costs are nearing their lows. The focus now shifts to the sustainability of retail and unsecured loan growth, and whether a rise in corporate capital expenditure (capex) will support ongoing loan-growth momentum.

NIM trends displayed inconsistencies, with mid-sized private and public sector banks reporting margin expansions. In contrast, several large private banks witnessed declines in margins due to higher corporate loan growth paired with lower lending spreads, with ICICI Bank noted as an exception. Despite slight moderation in CASA ratios, funding costs stayed stable for major banks. Equirus maintains a cautious yet optimistic outlook on credit demand, while the pace of margin recovery remains critical to earnings growth.