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We expect 2QFY27 to be a stable quarter. We expect ~11% yoy earnings growth.. We expect NII to grow 11% yoy and non-interest income to decline due to lower treasury income. We expect private banks to report 20% yoy earnings growth (lower base in select banks like IIB and Axis Bank) and PSU banks to report flat yoy earnings decline (factoring in the recent disclosure from BoB). We see NIM to be stable or marginally lower qoq depending on the quantum of deposits raised through FCNR deposits, while lending yields have been stable for the quarter. We are building in credit cost at lower levels, factoring in lower slippages for the sector, while we expect recoveries from bad loans to keep credit costs lower for PSU banks. Segments that were impacted by the recent MFI and other unsecured loan portfolio are showing consistent improvement, and we should see this translating into lower credit costs across players.

 

We have seen conversation shift back toward NIM as loan growth is solid and asset quality is not showing any major concerns based on our channel checks across various parts of the loan portfolio. While concerns around Middle East geopolitical risks and monsoon-related economic weakness persist, we have yet to observe any discernible spillover effects in lenders' portfolios. The lagged nature of such risks, coupled with materially improved borrower quality following a relatively benign credit-cycle adjustment, has left lenders entering this period with stronger balance sheets and underwriting discipline. As a result, industry confidence remains intact, with credit growth ambitions continuing to outweigh macro-driven caution. A key discussion point is the impact of FCNR deposits. For large private banks, these inflows may dilute reported CASA ratios and create a short-term drag as funding raised at attractive offshore spreads takes time to be deployed, whether through loan growth or replacing higher-cost liabilities. We estimate a 10-15 bps quarterly impact from FCNR deposits.

 

We continue to view large private banks as the preferred way to position for multiple expansion, relative to mid-tier banks, regional lenders and SFBs.. The full benefit of FCNR inflows should become evident by 3QFY26, while balance sheets remain well insulated against a deterioration in the macro environment, whether from policy-rate volatility or geopolitical risks. Importantly, non-financial overhangs, including management-transition concerns, appear largely behind us, particularly at HDFC Bank