Whalesbook
Margin Squeeze and Rising Costs
As the fourth quarter of fiscal year 2026 draws to a close, Indian banks and Non-Banking Financial Companies (NBFCs) are navigating a complex financial landscape. Nirmal Bang anticipates total net interest income growth of about 9.9% year-on-year for its covered banks, with operating profit before provisions rising by 12.1%. However, net profit is expected to grow a more modest 8%, largely due to shrinking margins year-on-year. A sequential improvement in net interest margins (NIMs) is forecast, helped by adjusting rates on fixed deposits. Operating expenses are projected to improve by 111 basis points sequentially, and credit costs are expected to fall to 1.1%, a drop of 0.24% year-on-year. This creates a challenging environment where operational efficiencies may only partly offset the margin squeeze.
Meanwhile, broader financial pressures are mounting. Capital outflows, a growing trade deficit, and ongoing geopolitical uncertainties, especially the conflict in West Asia, have significantly tightened domestic liquidity, pushing the banking system into a cash shortage. This has led to a 50–70 basis point increase in short-term interest rates over the past quarter. Banks are increasingly relying on expensive short-term funding like certificates of deposit. Access to global debt markets has also become more difficult. Indian companies raised 43% less via overseas bonds in FY26 compared to the previous year, due to sharply higher hedging costs driven by geopolitical risks and a weaker rupee.
Competition and Niche Performance
Within the NBFC sector, companies specializing in gold loans are expected to perform well, boosted by higher gold prices. However, growth in gold volume and customer numbers remain key indicators. Specialized lenders like HUDCO reported strong growth in approved loans and actual money disbursed for FY26, up 28.76% and 27.87% respectively. Yet, their profit growth is forecast to lag at 8.3% year-on-year, mainly due to an estimated Rs 2 billion loss from valuing foreign currency loans at current market prices amid currency fluctuations.
In the Housing Finance Company (HFC) segment, larger players are facing tougher competition from banks that have aggressively entered key lending areas. This situation forces HFCs focused on affordable housing to depend more on their specific regions and customer groups for setting prices. Nirmal Bang forecasts 8.3% loan growth and a more modest 4.3% earnings growth for its covered HFCs. Whether credit demand can be sustained is also being questioned, with concerns that slowing consumption, inflation, and tighter monetary conditions could slow loan growth, although credit momentum is still strong for now.
Varied Stock Valuations
The listed banking and NBFC stocks show diverse valuation profiles. State Bank of India (SBI) is trading at a P/E ratio of roughly 11.13 to 12.2, near its average historical valuation, though GuruFocus rates it as 'Significantly Overvalued'. HDFC Bank's P/E is around 15.73 to 22.5, positioning it slightly above the industry average but below its 10-year median, with GuruFocus deeming it 'Modestly Undervalued'. Axis Bank's P/E is about 13.78 to 14.75, generally trading at a slight premium over competitors and the industry average, though this valuation has led to varied analyst opinions. Federal Bank's P/E is around 15.0 to 16.3x, seen as expensive compared to its peers. City Union Bank's P/E of approximately 10.36 to 14.7x shows mixed signals, appearing cheap by some measures but expensive against the wider banking sector average. Can Fin Homes stands out with a P/E of 10.40 to 11.22, offering 'good value' compared to its peers and the sector. Home First Finance, however, trades at a higher P/E of 19.8 to 23.68, seen as expensive compared to its competitors.
Analyst views are divided; while Nirmal Bang has top picks, other firms have changed ratings, with MarketsMojo shifting HDFC Bank and Axis Bank to 'Hold' ratings.
Deeper Systemic Risks Emerge
Beyond immediate pressures, major risks are present. Rising geopolitical tensions, especially the ongoing conflict in West Asia, are causing wider stress in the financial sector, with multiple impacts. This is leading to less liquidity, higher credit costs, and greater currency swings. The weaker rupee, fueled by higher oil import costs and global investor caution, increases funding expenses and limits capital flowing in.
A key concern is whether credit growth can continue as loan-to-deposit ratios (LDRs) are stretched and at multi-year highs. Banks are increasingly using more expensive short-term funding as deposit growth fails to keep pace with lending, pushing new LDRs much higher. Risks to asset quality are appearing, especially in small business (MSME) and unsecured loan areas, where loan defaults remain high. Moody's has warned of possible worsening asset quality in unsecured consumer and vehicle loans. The Reserve Bank of India's past actions, like increasing risk weights on unsecured retail loans, show the regulator is aware of these weaknesses. Additionally, global economic uncertainty is making companies hesitant about borrowing abroad, increasing reliance on domestic markets and potentially straining available capital.
Outlook: Navigating a Volatile Environment
The near-term outlook depends on managing cash availability and how interest rates affect earnings. Key factors to watch from Q4 FY26 results include loan growth, net interest margin forecasts amid global pressures, deposit gathering strategies, and asset quality prospects for MSMEs and unsecured loans, according to Nirmal Bang. Banks and NBFCs will be tested on their ability to manage these competing pressures, balancing growth goals with strong risk management amid a volatile global economy and geopolitical landscape.