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Private banks reported healthy traction in 1QFY27, while PSUs had a softer start

* The RBI, in its fortnightly print, reported a 17.7% YoY systemic credit growth. This is reflected in 1QFY27 business updates across our coverage universe:

a) Large private banks grew 16.2% YoY/3.1% QoQ

b) PSBs grew 15.1% YoY/1.7 QoQ

c) Mid-sized banks grew 13.1% YoY/3.3% QoQ. Within our non-coverage universe, regional banks grew 19.3% YoY/4.7% QoQ, while smaller PSBs and SFBs reported a strong credit growth print.

* The growth distribution remains broad-based, with a strong pickup in the corporate and MSME segments alongside healthy growth trends in retail gold loans and vehicle loans while credit card growth remains muted. PSBs have been gaining incremental market share in credit and accounted for 52.9% of the loan mix as of Mar’26.

* Deposit growth across our coverage universe continued to lag behind credit growth. PSBs struggled with a growth of 10.0% YoY/0.5% QoQ, while large private banks delivered 14.1% YoY/3.1% QoQ growth. As a result, the systemic LDR increased shall further rise beyond the current~83.4% levels. Meanwhile, CASA ratios too declined ~150-300bp across several banks.

* The recent RBI relief measures for FCNR (B) Deposits are expected to facilitate deposit mobilization, with anticipated forex inflows of USD40-50b. This should help sustain growth momentum and support further reduction in wholesale funding costs.

* NIMs are expected to remain under pressure across the banking system, especially in 1HFY27, largely due to a rise in the cost of deposits, higher growth in the secured mix, and limited pricing power for banks. Baring IIB, FB, and DCBB, we expect margins to remain stable or contract across our banking universe in 1QFY27.

* We have increased our FY27 credit growth estimates for our banking coverage universe from 13.6% to 14.6%, with private banks expected to grow at 15.8% YoY and PSBs at 13.7% YoY. Our estimates are higher compared to the BBG consensus estimates of ~14.2%, and we believe there remains an upside risk to our estimates. However, we remain watchful of the evolving macro conditions, particularly the recent escalation in the West Asia crisis and crude prices.

* We expect the banking sector’s earnings to rebound with ~15% CAGR over FY26-28, fueled by ~15% CAGR in net interest income (NII). Private banks, with an anticipated earnings CAGR of ~20%, are likely to outperform PSU banks, which are expected to post an earnings CAGR of ~10%. Our top ideas are ICICIBC, HDFCB, SBIN, AUBANK, and RBK.

Broad-based growth; Retail gold loans continue to surge while credit card growth remains muted

The credit growth trends demonstrate broad-based expansion, with surge in corporate and services sectors growing at 18.7% and 19.1% respectively in the month of May-26. There has been a meaningful increase in industry credit from midsingle digits in 1HFY26 to mid-teens from Dec’25, largely due to hardening of bond yields and higher working capital requirements by large and mid-corporate/ MSMEs. Bank credit to NBFCs has also thus seen a rapid surge over the past few months. The growth in the retail segment has been steady at 15.7%, largely led by continued surge in retail gold loan segment growing at 104% and vehicle loans growing at 17% while growth in the credit card segment continues to be muted.

Deposit mobilization lagging; FCNR(B) flows to provide some relief

Deposit growth at 12.0% YoY currently continues to lag credit growth. Deposit growth has remained in the 10-12% range since the start of CY26, leading to an alltime high LDR ratio of ~83.4%. However, the RBI’s current easing measures on FCNR (B) deposits and overseas borrowings are likely to attract USD40-50b of forex flows, which translates to 1.5-1.8% of aggregate system deposits. These flows are likely to provide temporary relief from deposit mobilization pressures and liquidity crunch, with banks having multiple avenues to attract funding. We expect the deposit mobilization pace to gain further traction, supporting credit growth trends. We have built in a deposit growth of 13.8% YoY for FY27 across our banking universe.

NIMs to have a negative bias amid sticky cost of deposits and secured mix

NIMs are expected to have a negative bias for 1QFY27, with rates remaining flat over the last six months and the full impact of the previous rate cuts behind. With current growth being led by a pickup in wholesale and MSME credit, improving pricing power across these segments could remain challenging. Deposit rates have remained elevated and witnessed marginal increases across buckets in 1QFY27 (especially with mid-size banks). Additionally, a decline in CASA mix across the industry is likely to increase the cost of deposits for the system. While we estimate a negative bias on NIMs in the near term, we remain constructive on the mediumterm outlook, supported by a potential easing in borrowing costs and possible rate hikes by the end of FY27. We have built in ~15% NII CAGR across our banking coverage for FY26-FY28.

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