Indian banks at 'decisive profitability inflection point': Nomura

Indian banks are at a "decisive profitability inflection point," says Nomura. Net interest margins (NIMs) have bottomed out and are set to recover, while moderating stress in unsecured retail and MFI segments will lower credit costs.

Profitability Inflection Point Nears as NIMs Bottom Out

Indian banks are set for a "decisive profitability inflection point" as net interest margins (NIMs) begin to recover after several quarters of compression, according to a latest sector report by Nomura.

Nomura said that the recently reported quarterly results indicate that "the downcycle for NIMs has bottomed out, and we expect NIMs to gradually improve led by a re-pricing of term deposits." The brokerage expects margins to strengthen over the next two years.

With rate-cycle pressures easing, Nomura wrote: "We expect NIMs to improve by approx 17bp over FY26-28F... While additional rate cuts may delay margin recovery, we expect re-pricing of term deposits and pick-up in growth in the higher-yielding assets to largely offset the impact."

Easing Credit Costs to Bolster Profitability

Improvement in the unsecured retail and microfinance segments is also aiding the outlook. Nomura highlighted that "moderating stress in the unsecured retail and MFI segments should result in lower credit costs going ahead," which in turn is expected to bolster profitability.

With margins expected to rise and credit costs seen easing, the report forecasts a steady uplift in profitability metrics. "RoAs should strengthen over FY26-28F," it noted, adding that sector return ratios could expand by nearly 15 basis points in that period.

Credit Growth Expected to Accelerate

Credit growth is also anticipated to accelerate, aided by supportive fiscal and monetary measures. "We expect loan growth to accelerate System loan growth has stayed modest at approx 10-11 per cent in FYTD26F largely due to a softer macro backdrop and more cautious underwriting in segments that had witnessed elevated stress, such as personal loans, credit cards, and microfinance." The report noted.

The brokerage says that conducive policies, such as repo-rate, tax, CRR, and GST reductions, should aid in providing a boost to system credit growth.

"A broad-based pick-up in private-sector capex remains elusive. However, with delinquency trends in the key unsecured categories now showing signs of improvement, banks are gradually regaining confidence to step up growth in these segments."

Sector Primed for Re-rating

Overall, the brokerage believes the sector is primed for a re-rating. "Sector valuation at 2.1x one-year forward BVPS looks inexpensive, and improving RoAs and strong EPS CAGR make a compelling case for re-rating of the sector." (ANI)

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