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Lending yields stable; pace of deposit repricing moderates NIMs view divergent; bias negative for mid-size banks

* Yields on fresh loans rose 6bp for PSBs and declined 7bp for PVBs, resulting in a 1bp increase for the sector in May’26.

* WALR on O/S loans declined by 1bp MoM, with PSB remaining flat MoM and PVBs declining by 4bp MoM, indicating that bulk of the repo repricing has been largely done.

* The one-year MCLR for PVBs declined by 10-65bp over the past year, with HDFC and RBL witnessing maximum decline. For PSU banks, it has been calibrated at 5-30bp, as deposit rates have seen a minimal decline.

* The Weighted Average Term Deposit Rate (WATDR) for the system continued to decline at a calibrated pace, falling 2bp MoM in May’26 to 6.57%, with both PVBs and PSBs reporting a 2bp MoM decline each.

* Systemic credit growth improved to 17.7%, led by:

i) stronger working capital loan demand amid rising input costs

ii) a regulatory shift in focus from LDR to the LCR/NSFR framework

iii) a sharp increase in corporate borrowings following the rise in bond yields. We anticipate continued momentum, led by a pickup in corporate, steady retail growth, and sustained expansion in MSME and gold loans. Consequently, we expect credit growth to sustain at 14% over FY27.

* Top picks: ICICI Bank, HDFC Bank, SBI, and AUBANK.

Fresh loans flat MoM; O/S loan yields stable MoM

* Yields on fresh loans increased by 6bp for PSBs, while they declined 7bp for PVBs, resulting in a 1bp MoM increase in overall SCB yields in May'26. On a cumulative basis during 1QFY27, fresh loan yields have improved 9bp for PSBs and remained broadly flat for PVBs, translating into an overall sectoral improvement of 11bp.

* WALR on O/S loans declined 1bp MoM to 8.97% in May'26. O/S loan yields for PSBs remained flat MoM, while those for PVBs declined 4bp MoM. Over 1QFY27, WALR declined 2bp for PSBs, 3bp for PVBs, and 2bp at the sector level. With the bulk of repo-linked loan repricing now behind us, further pressure on lending yields is expected to remain limited.

* One-year MCLR declined for PVBs by 10-65bp over the past year, with HDFC and RBL witnessing a maximum decline of 65bp YoY, while ICICI witnessed the lowest decline at 10bp YoY. PSBs’ MCLR rates have declined in a calibrated range of 5-30bp YoY, with Canara Bank remaining largely flat, recording a 5bp YoY decline.

* With the repo rate remaining stable at 5.25% since the last rate cut in Dec'25, loan repricing across most banks has largely been completed. Consequently, we do not expect any meaningful impact on asset yields from further rate repricing. Going forward, movements in yields are likely to be driven primarily by changes in the product mix and the residual repricing of TDs.

Our view: Prefer ICICIBC, HDFCB, SBI, and AUBANK

* Growth across the banking sector continues to remain healthy, with systemic credit growth sustaining above 17% over the past two fortnights. We expect the momentum to continue, supported by a pickup in corporate lending, steady retail growth, and sustained traction in MSME and gold loans. Accordingly, we expect systemic credit growth at ~14% in FY27.

* Asset quality remains healthy across most segments. Our channel checks indicate no immediate impact from the West Asia conflict so far, although a rise in input costs and some pressure on operating margins could weigh on the profitability of underlying borrowers. We continue to closely monitor the business banking and CV segments given the evolving situation.

* We estimate our coverage universe earnings to expand at a 15% CAGR over FY26-28, with PVBs expected at 20% CAGR and PSU banks at 9.6% CAGR over the same period.

* Top picks: ICICI Bank, HDFC Bank, SBI, and AUBANK.

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