Bank earnings could get a foreign-funding lift

Indian banks are poised for enhanced net interest income (NII) and earnings growth in the fiscal year 2027 (FY27), according to ICICI Securities. The brokerage highlights strong foreign currency non-resident (FCNR) deposit mobilization, robust credit demand, and favorable asset quality as key factors contributing to this positive outlook.

The system is anticipated to witness credit growth of approximately 15% year-over-year (YoY) in FY27, with FCNR deposits playing a significant role in bolstering NII and earnings. The brokerage has maintained a positive stance on the banking sector following a robust first quarter, where NII growth reached a multi-quarter peak of 11% YoY in Q1FY27.

Core pre-provision operating profit (PPOP) and profit after tax (PAT) grew by around 15-17% YoY, driven by disciplined expense management and stable provisioning. Loan growth accelerated by around 18% YoY in the quarter, fueled by a substantial surge in non-banking financial company (NBFC) lending (32% increase) and a 17% rise in large industry loans.

Retail gold loans experienced an exceptional surge of about 95% YoY, whereas retail credit growth excluding gold remained stable at around 12% YoY. While private banks have gained momentum sequentially, with loan growth of around 4% quarter-over-quarter (QoQ) compared to 2% for public sector banks (PSBs), the brokerage anticipates that the current loan growth composition will remain beneficial for PSBs and expect similar credit growth for both PSBs and private banks through FY27.

Deposit growth has shown a sharp uptick, reaching 15.4% YoY by the end of July, up from around 12% in Q1FY27. FCNR(B) mobilization has been a crucial catalyst, with inflows reaching USD 52 billion by August 13, constituting approximately 2% of outstanding deposits. The Reserve Bank of India (RBI) has expedited the closure of the FCNR(B) mobilization window to the end of August, as opposed to the initial end of September.

The brokerage believes that these deposits could aid banks' domestic funding costs and NII, rendering NII growth a more crucial metric than near-term net interest margin (NIM) fluctuations. However, NIM performance remains inconsistent, with significant declines observed in double-digit sequential declines among large private banks, while mid- and small-sized private banks have benefited from gold and SME lending.