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Estimate ~16% credit growth for FY27; NIMs to witness broad-based recovery from 4Q

* Banks garnered USD133b in FCNR(B) inflows, topping Street estimates and supporting 2QFY27 business growth. ICICIBC captured the highest market share (13.4%) in FCNR(B) deposits, while RBK was the highest in terms of deposits mobilized as a % of outstanding deposits at 26%. PSBs mobilized a relatively lower proportion of their FCNR(B) deposits, ranging between 2% and 5% of their outstanding deposit base.

* KMB and RBK have the lowest leverage against their FCNR(B) deposits, offering scope for higher earnings accretion through deployment into higher-yielding assets. In contrast, most PSBs, including YES and IDFCFB, have self-leveraged 70–86% of their FCNR(B) deposits. At an aggregate level, leverage against FCNR(B) deposits stood at ~58%.

* For banks that disclosed FCNR(B) flows, credit growth (excluding FCNR(B) loans) stood at 18% YoY/4% QoQ in 2QFY27, while deposit growth (excluding FCNR(B) deposits) stood at 12% YoY/2.5% QoQ. At an aggregate level, the effective C/D ratio for these banks, excluding leverage against FCNR(B) deposits, stood at 83.7% (vs the reported C/D ratio of 85.5%). Further excluding CRR/SLR requirements on FCNR(B) deposits, the effective C/D ratio stood at 82.9%.

* Private banks witnessed higher NIM moderation, reflecting a larger proportion of deposits mobilized alongside higher leverage. KMB, IDFCFB, and EQUITASB reported significant NIM contraction of 22bp, 38bp, and 55bp, respectively. In contrast, PSBs witnessed a positive impact on margins.

* We estimate banks to deliver healthy earnings from 4Q onwards, as surplus liquidity gets deployed and the benefits of rate transmission provide a further boost to revenue growth. PNB, KMB, INBK, and RBK have relatively higher liquidity on their balance sheets compared to peers.

* We remain buoyant on systemic credit growth and estimate 16.5% YoY growth for FY27, factoring in huge FCNR(B) inflows. We expect the banking sector earnings to rebound with ~17% CAGR over FY26-28, fueled by ~17% CAGR in NII. Private banks, with an anticipated earnings CAGR of ~22%, are likely to outperform PSU banks, which are expected to report ~11% earnings CAGR. Top ideas: ICICIBC, HDFCB, KMB, AUBANK, and SBIN.

ICICIBC captures 13% market share; RBK mobilizes the highest deposits as a proportion of its outstanding deposit base

* The RBI’s special FCNR(B) window (available from 8th Jun’26 to 31st Aug’26), garnered FCNR(B) deposits of USD133 for a period of 3–5 years. The RBI bore the entire hedging cost, while banks were exempted from CRR and SLR requirements on these deposits, making the window particularly attractive for banks.

* ICICIBC captured the highest market share (13.4%) among FCNR(B) deposits, followed by HSBC/HDFC/SBIN/AXSB at 10.9%/8.6%/8.2%/ 8.0%, respectively. Large and select mid-sized private banks garnered a higher proportion of their overall deposits, ranging from 3% to 26%. RBK garnered the highest proportion at 26%, capturing a 2.6% share of FCNR(B) deposits market, compared to 0.5% share of the overall deposits market. IDFCFB, KMB, and ICICIBC were among the other banks that captured a materially higher share of FCNR(B) deposits, compared to their overall deposits market share.

* PSBs mobilized relatively lower proportion of their overall deposits in the FCNR(B) scheme, ranging from 2% to 5% of the overall deposit base.

NIMs contract for private banks; positive impact for PSBs

NIMs for private banks under our coverage declined 9-55bp QoQ, largely reflecting the impact of surplus liquidity on balance sheets, driven by a higher proportion of deposits getting mobilized and greater leverage against these deposits. KMB witnessed the sharpest contraction among large private banks at 22bp, while HDFCB, ICICIBC (adj. NIM), and AXSB reported only a 10bp contraction. IDFCFB and EQUITASB witnessed significant contraction of 38bp and 55bp, respectively, among mid-sized banks. FB witnessed a neutral impact owing to a lower proportion of FCNR(B) deposits mobilized, while RBK witnessed NIM accretion, aided by the full benefit of capital infusion from Emirates NBD. PSBs witnessed a positive impact on NIMs, given the lower proportion of deposits mobilized and the utilization of a large part of these deposits to repay high-cost borrowings.

Deployment of surplus liquidity to drive earnings reflation

While FCNR(B) deposits are likely to remain NIM-dilutive through 3Q, we expect earnings accretion from 4Q onwards as surplus liquidity on balance sheets is progressively deployed into higher-yielding lending assets from the investments and cash book. The shift in balance sheet mix, along with repo-rate hike, is likely to drive earnings boost for the banking sector. Private banks are better placed compared to PSBs, given the higher surplus liquidity from FCNR(B) deposits and higher repolinked loan book. We built in an NII CAGR of 17% for FY26-FY28 for our banking universe, with private banks expected to grow at 18% and 16%.

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