Whalesbook
Banks Eye Stable Margins Despite Credit-Deposit Gap
Indian banks are set to report stable or even expanding net interest margins (NIMs) in the October-December 2025 quarter, defying concerns over loan growth outpacing deposit expansion. Rikin Shah, Senior Vice President at IIFL Capital, forecasts this resilience, citing a cut in the Cash Reserve Ratio (CRR) and elevated loan-to-deposit ratios (LDRs) as key supports.
"We could actually see some expansion in this quarter because of two reasons. First, the CRR has been cut, so those assets... never earned any money for the banks. Now they are deployed to the loan, so you make better yields on that," Shah explained. He anticipates most banks will register NIM expansion of two to 10 basis points in Q3FY26, with the full impact of a recent 25-basis-point repo rate cut to be more apparent in the subsequent quarter.
Divergence in Credit Dynamics
System-wide data reveals credit growth at approximately 12% year-on-year, significantly ahead of deposit growth at roughly 9.4%. This divergence is more pronounced among public sector undertaking (PSU) banks, where the gap between loan and deposit growth stretches to 300-400 basis points. Large private banks, conversely, have largely managed to align deposit growth with lending.
The Reserve Bank of India's (RBI) increased focus on the liquidity coverage ratio (LCR) has led to a near-term tolerance for higher LDRs. However, Shah emphasized that sustained deposit mobilization is crucial for long-term loan growth, particularly for PSU banks.
Investment Preferences Shift
This credit dynamic shapes Shah's investment outlook. He favors large private sector banks over PSU banks, with State Bank of India (SBI) being the sole exception among public lenders, maintaining a buy rating. Axis Bank, ICICI Bank, and RBL Bank are among his preferred private sector names, alongside a constructive view on Kotak Mahindra Bank.
"Firstly, we expect the larger private banks to deliver almost 20% earnings CAGR in the next two years versus PSU banks, who could be at low double digit at best," Shah noted, attributing this to faster repricing of repo-linked loans.
Retail and MSME Sector Strength
Beyond earnings projections, broader credit trends remain supportive. India's retail and MSME loan books continue to expand at a healthy 17-18% clip, with asset quality largely stable. While affordable housing and auto loans present persistent stress points, personal loans are showing signs of recovery, and credit card delinquencies have stabilized.