RBI's 25 bps repo rate hike may boost large banks' EPS by 5%: Report

A 25-basis-point repo rate hike by the RBI could expand large banks' net interest margins by up to 10 basis points and lift earnings per share estimates by as much as 5 per cent, according to a report by IIFL Capital.

A 25-basis-point repo rate hike by the Reserve Bank of India (RBI) could expand large banks' net interest margins (NIMs) by up to 10 basis points and lift earnings per share (EPS) estimates by as much as 5 per cent, according to a report by IIFL Capital.

Impact of Repo Rate Hike on Bank Earnings

The Monetary Policy Committee (MPC) unanimously raised the repo rate by 25 basis points to 5.5 per cent and shifted its policy stance from ‘neutral’ to ‘calibrated tightening.’ The brokerage estimates that a 25-basis-point rate hike could expand net interest margins (NIMs) of larger banks by 6–10 basis points and boost earnings per share (EPS) estimates by 3–5 per cent.

“Our sensitivity analysis suggests a 25bps rate hike should drive 6-10bps NIM expansion and 3-5% EPS upgrade for larger banks,” it said, highlighting that PSU banks “will see lower NIM expansion; pass-through to EPS will be higher.”

Future Growth Projections

Looking ahead, the report noted, India's banking sector could see earnings per share (EPS) growth accelerate to a compound annual growth rate (CAGR) of 20 per cent over FY26–FY28, compared with the current estimate of 14 per cent, if the Reserve Bank of India raises interest rates by a cumulative 50 basis points.

Loan Repricing and Rate Transmission

On the transmission of higher interest rates, the brokerage noted that banks with a greater share of repo-linked loans are likely to benefit from faster loan repricing. “The banks with a higher share of repo-linked loans...should see faster loan repricing vs. fixed rate lenders,” it said.

Tightening Liquidity Conditions

Meanwhile, the report highlighted tightening liquidity conditions in the banking system, noting that liquidity has declined from a recent peak of Rs 11 trillion to Rs 5 trillion, equivalent to around 2 per cent of net demand and time liabilities (NDTL).

The report further noted that banking system liquidity has declined from a recent peak of Rs 11 trillion to Rs 5 trillion, equivalent to around 2 per cent of net demand and time liabilities (NDTL). It expects liquidity to tighten further due to increased currency circulation and regulatory measures, including US dollar sell-buy swaps, variable rate reverse repo (VRRR) operations, open market operation (OMO) sales and foreign exchange market interventions.

Impact on Call and CD Rates

Consequently, the weighted average call rate (WACR) and three-month certificate of deposit (CD) rates are expected to rise gradually, after declining by 15 basis points and 100 basis points, respectively, since the announcement of the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit window.

Banking Sector Valuations

On banking sector valuations, the report noted that mid-sized banks have seen their valuations rise by 5–25 percentage points so far this calendar year, while public sector banks have witnessed a decline of 5–25 percentage points. Against this backdrop, large private sector banks offer a relatively more attractive risk-reward proposition. “Mid-size banks have re-rated 5-25ppt CYTD vs 5- 25 ppt de-rating for PSU banks and HDFC and unchanged for large Pvt banks. Thus, risk-reward is more attractive for larger banks,” it said. (ANI)

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