Banks Show Strength Amidst Deposit Concerns

India's banking sector ended the fiscal year with strong headline results, prompting Nomura to reaffirm 'Buy' ratings on several major lenders. This positive outlook is tempered by a key observation: while loan growth has been robust, the deposit surge at the close of the quarter appears to be a year-end push rather than steady, organic growth. The difference between period-end and average deposit figures signals this.

Nomura's Top Picks and Deposit Details

Nomura's strategy favors banks with strong balance sheets and clear growth prospects. HDFC Bank, even with loan growth around 12% year-on-year (slower than industry averages), keeps its 'Buy' rating. A significant deposit increase at the end of the quarter, for both current/savings accounts (CASA) and term deposits, helped its balance sheet. This brought the loan-to-deposit ratio down to 95.3%. Nomura noted large quarter-over-quarter deposit growth of 8.6%, with CASA up 10.4% and term deposits up 7.7%. However, average deposit growth showed less momentum, highlighting the sector-wide concern.

Axis Bank is another key pick, with Nomura reiterating its 'Buy' call. The bank reported strong loan growth of 18.4% year-on-year, faster than industry trends, and a 13.9% deposit increase. Its loan growth was a healthy 6.3% quarter-over-quarter. Axis Bank also improved its funding mix, with its CASA ratio rising to 39.6%, maintaining a stable loan-to-deposit ratio. Its P/E ratio is around 13-16x, positioning it favorably against peers.

Kotak Mahindra Bank also has a 'Buy' rating, though its 16.2% YoY loan growth was slower than some rivals. Deposit growth was healthy at 14.7%, supported by a strong CASA base with the ratio improving to 43.3%. Nomura noted the end-period CASA surge versus more modest average balances, typical for the sector. Kotak Mahindra Bank trades around a P/E of 19-31x, showing higher growth expectations than some public banks.

IndusInd Bank maintains its 'Buy' rating despite its loan book shrinking 8.7% year-on-year, though the pace of contraction slowed. Deposit growth was modest at 1.6% quarter-over-quarter, led by retail deposits. The CASA ratio improved to 31.3%. Significantly, its P/E ratio varied widely, with some reports showing a loss and others a P/E of 16-20x. This mixed signal needs careful review.

IDFC First Bank's 'Buy' rating is backed by strong 20% year-on-year loan growth. However, deposit growth was flat quarter-over-quarter, facing challenges. Despite these near-term pressures, Nomura highlights stable asset quality and a strong funding base. The bank's P/E ratio is around 30-33x, suggesting a valuation for growth.

Bank of Baroda received a 'Buy' rating, driven by strong growth in loans (16.2% YoY) and deposits (12.0% YoY). The bank is among the most well-priced, with a P/E ratio between 6-7x, positioning it as a value stock.

Analyzing the Deposit Trend

India's banking system is entering 2026 on solid ground, supported by strong economic growth and stable asset quality, according to Moody's Ratings. System-wide loan growth is projected to grow 11-13% in FY27, up from about 13.5% year-on-year earlier in 2026. However, a persistent gap exists: deposits aren't growing as fast as loans, raising the system-wide loan-to-deposit ratio to about 83%. This funding gap can squeeze net interest margins (NIMs), especially for larger banks facing higher deposit costs, even as overall profits are expected to rise. The RBI's decision on April 8, 2026, to keep the repo rate at 5.25% signals stable fixed deposit rates, offering little room for higher returns on new deposits. This could squeeze margins further if competition for funds increases.

Historically, strong year-end deposit inflows have sometimes been followed by slower growth if banks' customer acquisition and retention efforts aren't strong. The current situation suggests a similar pattern, where banks may have used short-term funding or focused efforts to boost end-of-period numbers. While Bank of Baroda (P/E ~6.2x) and Axis Bank (P/E ~14.7x) appear well-priced, Kotak Mahindra Bank and IDFC First Bank trade at higher prices (20-33x). This indicates market expectations of continued growth that depends on steady deposit growth.

Risks to Deposit Growth Sustainability

The main risk is whether the reported deposit growth can last. If the end-period surge was temporary, banks could face persistently higher funding costs, squeezing net interest margins. This is especially concerning for IndusInd Bank, where recent reports show a P/E ratio 'At Loss', suggesting profitability issues or investor doubt, despite Nomura's 'Buy' rating. A continued lag in deposit growth versus loan expansion, pushing the loan-to-deposit ratio towards 83%, requires careful monitoring. If this trend continues, banks may be forced to use costlier wholesale funding or raise deposit rates sharply, affecting profits. Also, while sector asset quality is stable, an ongoing geopolitical conflict could increase loan defaults, especially for MSMEs. The varying P/E valuations, from a value stock like Bank of Baroda (~6.2x) to growth-oriented IDFC First Bank (~30x), show different investor views on risk and growth sustainability, with IndusInd Bank's negative P/E being a major concern.

Outlook for Indian Banks

Despite worries about deposit growth sustainability, analysts expect continued profit growth from loan expansion, fees, and managed credit costs. Moody's forecasts NIMs to widen slowly as deposit costs fall, backed by overall economic growth. However, differing views on NIM performance among banks—with mid-sized lenders possibly widening margins while larger ones protect theirs—show a complex market. The sector's stability is supported by strong capital reserves and government backing, especially for public banks. Investors will likely favor banks showing steady, natural deposit growth and good management of funding costs to navigate changing market conditions.