Banking Sector Update : Sequential movement in NII/NIM are monitorables by Prabhudas Lilladher Ltd
Sequential movement in NII/NIM are monitorables
Banks under our coverage are likely to see a weak quarter due to seasonality as core earnings (ex-IIB) may fall by -2.6% QoQ/+2.0% YoY to Rs577bn (-2.4% QoQ in Q4FY25). Loan/deposit growth is expected at +1.0%/+0.6% QoQ and 10.6%/11.7% YoY (+3.7%/+5.0% QoQ in Q4FY25). LDR may rise sequentially by 26bps to 83.3%. While reported NIM might fall by 10-15bps QoQ owing to repo rate reduction, calculated NIM may remain flat QoQ at 3.32% vs 3.53% a year ago (-6bps QoQ in Q4FY25) due to (1) back-ended growth in Q4 (2) sharp increase in period end cash balances in Q4. Hence sequential NII growth would be a key monitorable in this quarter. Due to seasonality in case of PSU banks, fees might fall by 11.1% QoQ but grow by 15.1% YoY to Rs394.7bn, which would be partially offset by 5.9% QoQ fall in opex to Rs914bn (+11.2% YoY). Core PPoP may be Rs927bn (-1.5% QoQ/+3.4% YoY) due to weaker NII/fees. Slippage ratio may increase owing to rise in agri slippages (usually in Q1). Banks’ PAT is expected to decrease by 5.3% QoQ but increase by 6.2% YoY to Rs673bn. Among our coverage, we prefer ICICIB and KMB.
* System credit could grow ~10% YoY in Jun’25: System credit (incl. HDFCL) grew by +8.8% YoY in May’25, which has been decelerating since Feb’24 led by slower offtake in NBFC, unsecured, agri and housing. Industry/services grew by 4.8%/8.7% YoY each and large industries grew by +1.0% YoY. Agri loans grew by +7.5% YoY. Within services, pace of NBFC credit accretion fell as growth reduced from 12.7% YoY in Jul’24 to -0.3% YoY in May’25. Retail credit growth is also slowing at 11.1% YoY (14.4% in Jul’24) driven by housing, gold and unsecured. System credit (incl. HDFC) could grow by ~10% YoY in Jun’25, while system deposits were up by 10.4% YoY as at 13th Jun’25. Coverage banks may see loan/deposits growth of 10.6%/11.7% YoY in Q1FY26.
* Margins may improve: Loan yields may decline due to repo rate cut which would be partly offset by fall in cost of funds owing to reduction in SA/TD rates. As a result, NIM (calc.) could remain flat QoQ at 3.32%. NII may increase by 0.4% QoQ compared to loan growth of +1.0%. Due to seasonality in case of PSUs, fees could fall by 11.1% QoQ that would be offset by 5.9% QoQ decline in opex. Core PPoP may come in at Rs927bn (-1.5% QoQ).
* Slippages may increase though provisions might fall: Since Q1 generally sees higher delinquencies due to stress in agri (mainly large banks), slippages are expected to rise. Slippage ratio is expected at 1.29% (vs 1.10% in Q4FY25). As a result, GNPA ratio is expected to come in at 1.88%. Provision costs could be stable at 56bps as SBI had reported higher credit costs in Q4FY25. PCR for coverage banks may remain stable at 75.1%.
* Core PAT to improve QoQ: Core PAT for our coverage banks is likely to be lower by 2.6% QoQ to Rs577bn due to higher margins and lower opex. PAT may fall to Rs673bn (-5.3% QoQ).
* Large private banks: Loan growth could come in at 1.1% QoQ and 8.6% YoY while deposit accretion may be 1.3% QoQ/14.3% YoY. NII may increase by 0.4% QoQ; NIM may slightly inch up 2bps QoQ to 3.91% (-10bps in Q4FY25). Fees would fall by 3.2% QoQ, while opex may inch up by 1.9% QoQ. Core PPoP (ex-IIB) may come in at Rs543bn (-2.3% QoQ). Provisions are likely to increase by 9bps sequentially to 58bps due to agri slippages, while core PAT (ex-IIB) could fall by 5.5% QoQ at Rs352.1bn.
* Public sector banks: Loan growth is likely to be 0.8% QoQ compared to deposit growth of 0.2% QoQ. NII growth is expected of 0.3% QoQ, while NIM could increase by 1bp QoQ to 2.84% (-2bps in Q4FY25). Due to seasonality, fees/opex could fall by 22.7%/13.0% QoQ and core PPoP may decline by 0.3% QoQ to Rs365bn. Slippage ratio may rise by 29bps QoQ to 1%, while provisions may come in at 54bps. Core PAT is expected at Rs213.1bn (+3.1% QoQ).
* Mid-cap banks: Loan growth would be 1.3% QoQ, while NII growth may be 3.0% QoQ. NIM may rise by 1bp QoQ to 3.16%. Core PPoP could slightly fall by 0.4% QoQ to Rs19.1bn. Slippage ratio could fall by 5bps QoQ to 1.46%, while GNPA may come in at 2.22%. Core PAT may be Rs11.4bn (-10.1% QoQ) due to normalization of provisions in FB.
Top Picks:
* ICICI Bank: ICICIB remains the best performing bank due to earnings quality. Balance sheet is strong with CET-1 of ~16% and buffer provisions of 1%. While core PAT growth could be muted at 5.4% in FY26E due to NIM compression, once margins stabilize post FY26, core earnings growth could be strong at 16% YoY for FY27E. Core RoA at 2.1% for FY27 is the best-in-class. We maintain multiple at 2.9x on Mar’27 core ABV. Retain ‘BUY’ with TP at Rs1,700.
* Kotak Mahindra Bank: Lifting of RBI embargo could lead to better loan and deposit growth; bank also plans to increase share of unsecured loans from 10.5% to 15% which would cushion NIM. Core earnings growth is expected to be 18.3% YoY in FY27E with core RoA/RoE of 1.9%/11.5%. We keep multiple at 2.4x on Mar’27 core ABV. Retain ‘BUY’ with TP at Rs2,400.
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