Indian banks to see stronger credit growth, stable asset quality

Indian banks are set for stronger credit growth and stable asset quality, according to a report by Equirus. The earnings outlook will depend on net interest margin (NIM) recovery, deposit costs, and the durability of retail loan growth.

Indian banks are expected to witness stronger credit growth and stable asset quality in the coming quarters, while recovery in net interest margins (NIMs), deposit costs and retail loan growth will remain key factors for the sector's earnings outlook, according to brokerage firm Equirus.

In its mid-quarter review of the first set of Q1 FY27 banking results, Equirus said, "Entering 2QFY27, asset quality and capital remain strong, while deposit costs appear close to bottoming." The brokerage said the key focus in the coming months will be "the trajectory of NIM recovery into 2HFY27, the durability of retail/unsecured loan growth, and whether corporate capex inflects sufficiently to sustain the current loan-growth momentum."

Key Growth Drivers and Margin Trends

According to the report, corporate loans led sequential credit growth during the quarter, supported by higher working capital demand, a shift from bond market borrowings to bank loans and a gradual rise in regular capital expenditure. It also noted improved retail loan disbursements by some banks.

Equirus said NIM trends remained mixed across banks. Mid-sized private banks and public sector banks reported sequential expansion in margins, while large private banks, except ICICI Bank, saw a decline due to faster growth in corporate loans and lower lending spreads. The report added that funding costs remained broadly stable for large private and public sector banks despite moderation in CASA ratios, while asset quality stayed stable.

Future Outlook and Key Monitorables

The brokerage expects continued credit demand to support the banking sector. However, it said the pace of NIM recovery will remain a key driver of earnings growth. While deposit costs are nearing a bottom, margin improvement will depend on the loan mix and the level of competition.

The report also said retail and unsecured loan growth will need close monitoring as banks balance business growth with asset quality. It added that a sustained rise in corporate capital expenditure could further support loan growth, although the strength and durability of such a recovery remain uncertain.

The brokerage said banks are entering the next phase of FY27 with strong capital positions and stable asset quality, which provide a supportive base for growth. However, it cautioned that earnings recovery is likely to vary across lenders depending on how effectively they manage margins, deposits and credit growth. (ANI)

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