Indian Banks Poised for Earnings Growth in FY27, Says ICICI Securities

New Delhi: Indian banks are likely to see further improvement in net interest income (NII) and earnings growth in FY27, supported by strong foreign currency non-resident (FCNR) deposit mobilisation, healthy credit demand and benign asset quality, according to ICICI Securities. The brokerage expects systemic credit growth of around 15 per cent YoY in FY27, with FCNR deposits likely to be accretive to growth, NII and earnings.

The brokerage retained its positive stance on the banking sector after a healthy first quarter, with NII growth reaching a multi-quarter high of 11 per cent YoY in Q1FY27. Core pre-provision operating profit (PPOP) and profit after tax (PAT) grew around 15-17 per cent YoY, supported by controlled operating expenses and stable provisioning.

Loan growth accelerated to around 18 per cent YoY during the quarter, led by a 32 per cent rise in NBFC lending and 17 per cent growth in large industry loans, partly reflecting substitution from bank credit to the bond market. Retail gold loans remained particularly strong, growing around 95 per cent YoY, while ex-gold retail credit growth was stable at around 12 per cent.

ICICI Securities said private banks also gained momentum sequentially, with loan growth of around 4 per cent QoQ compared with 2 per cent for public sector banks (PSBs). However, it expects the current composition of systemic loan growth to remain favourable for PSBs and sees broadly similar credit growth for PSBs and private banks through FY27.

Deposit growth has also strengthened sharply, reaching 15.4 per cent YoY by end-July, from around 12 per cent in Q1FY27. FCNR(B) mobilisation has been a key driver, with inflows reaching USD 52 billion as of August 13, equivalent to around 2 per cent of outstanding deposits. The RBI has brought forward the closure of the FCNR(B) mobilisation window to end-August from end-September.

The brokerage believes these deposits could support banks' domestic funding costs and NII, making NII growth a more important indicator than near-term net interest margin (NIM) movements. However, NIM performance remains divergent, with large private banks witnessing double-digit sequential declines, while mid- and small-sized private banks benefited from gold and SME lending.

Asset quality remained better than expected despite macroeconomic risks. Gross slippages stood at around 1.2 per cent, down from 1.4 per cent a year earlier, while PSBs reported slippages of around 0.7 per cent, less than half the 1.7 per cent recorded by private banks.