Bank profitability to improve in FY27 on margin recovery, healthy credit growth: Systematix

Profitability of Indian banks is expected to improve through the remainder of FY27, supported by recovery in net interest margins (NIMs), sustained credit growth and lower credit costs, although deposit mobilisation and potential asset quality pressures will remain key challenges, according to a report by Systematix Institutional Equities.

Profitability of Indian banks is expected to improve through the remainder of FY27, supported by recovery in net interest margins (NIMs), sustained credit growth and lower credit costs, although deposit mobilisation and potential asset quality pressures will remain key challenges, according to a report by Systematix Institutional Equities. The brokerage said the recent 25 basis points repo rate hike is expected to support the repricing of loans ahead of deposit liabilities, helping banks gradually recover margins after a quarter of pressure from foreign currency non-resident (FCNR-B) deposit mobilisation.

"We expect bank profitability to remain healthy in FY27," the report said, identifying robust advances growth, lower slippages and improvement in NIMs as the key supporting factors. Reviewing the second quarter results of FY27, Systematix said large private sector banks reported an average 15 basis points sequential contraction in NIMs, primarily due to FCNR(B) deposit mobilisation and deployment of funds into lower-yielding assets.

Kotak Mahindra Bank, ICICI Bank, Axis Bank and HDFC Bank reported contractions of 22, 18, 10 and 8 basis points, respectively. In contrast, public sector banks reported an average 3 basis points sequential expansion in margins, supported by better cost-of-funds management. State Bank of India reported an 11 basis points improvement in domestic NIMs to 3.11 per cent.

"Management commentary across banks remains broadly constructive, with the recent 25bps repo rate hike expected to support asset repricing ahead of the eventual repricing of deposit liabilities," the report said. Credit growth remained healthy, with Bank of Maharashtra and ICICI Bank reporting year-on-year advances growth of 30.2 per cent and 30 per cent, respectively. However, Systematix expects growth to moderate from current levels while remaining healthy at around mid-teens.

On asset quality, the report observed that most banks recorded sequential improvements in slippages and credit costs during the quarter. However, geopolitical disruptions, supply-chain pressures and the effects of El Nino could create potential stress. The transition to the expected credit loss (ECL) provisioning framework also remains a key monitorable. (ANI)