NIMs of Indian banks to gradually improve led by re-pricing of term deposits: Nomura
New Delhi, December 3
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."
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 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."
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
Reader Comments
Good analysis, but I hope banks don't get too aggressive with unsecured loans again just because stress is "moderating." We saw what happened last time. Responsible lending should be the priority, not just profitability.
If margins are improving, will we see lower lending rates for home and car loans? That's the real question for the middle class. The report talks about profitability, but what about affordability for borrowers?
Working in the MFI sector, I can confirm the stress is easing on the ground. Repayment cycles are becoming more stable in rural areas. This is crucial for financial inclusion and the overall health of the banking system.
The link to private capex is key. Banks can be profitable, but if corporate investment doesn't pick up, it limits job creation and broader economic growth. Hope the "conducive policies" mentioned actually materialize soon.
Nomura's reports are usually reliable. This is positive for the overall market sentiment. A strong banking sector is the backbone of the economy. Hopefully, this uptick is sustained and not just a short-term blip.
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.