Bank margins to hold up in December quarter even as loan growth outpaces deposits, says IIFL Capital

Rikin Shah, Senior Vice President at IIFL Capital, says the Indian banking sector is entering the October–December quarter of 2025 (Q3FY26) earnings season with net interest margins (NIMs) holding up better than expected, even as loan growth continues to outpace deposit growth across the system.Margin resilience in the December quarter is being supported by a cut in the cash reserve ratio (CRR) and higher loan-to-deposit ratios (LDRs). “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 said.

He expects most banks to report NIM expansion of two to 10 basis points in Q3FY26, though a few outliers may see pressure. The impact of the December 25-basis-point repo rate cut, he added, will be felt more meaningfully in the January-March quarter of 2026 (Q4FY26).

System-wide data shows credit growth of about 12% year-on-year, running ahead of deposit growth at roughly 9.4%, but the stress is uneven. “It’s the public sector undertaking (PSU) banks where the wedge between the loan and deposit growth is almost 300 to 400 basis points,” Shah said, stating that large private banks have largely kept deposit growth in step with loan growth.

Shah also said the Reserve Bank of India’s (RBI) regulatory focus has shifted towards the liquidity coverage ratio (LCR), making it more tolerant of elevated LDRs in the near term. However, he stressed that stronger deposit mobilisation remains “absolutely critical” for sustainable loan growth, especially for PSU banks.

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This divergence underpins Shah’s stock preferences. He favours large private sector banks over PSU banks, with State Bank of India (SBI) the lone exception. “We like SBI among the PSU banking pack, and we have a buy rating on that,” he said. His preferred names include Axis Bank, ICICI Bank and RBL Bank, while he also remains constructive 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 said, citing faster repricing of repo-linked loans.

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Beyond earnings, broader credit trends remain supportive. India’s retail and MSME loan book continues to grow at 17–18%, with asset quality largely holding up. “The overall growth is actually healthy at 18% in retail plus MSME. And asset quality, there are only a few pockets where there are certain concerns,” Shah said. Affordable housing and auto loans remain stress points, while personal loans are “turning the corner” and credit card delinquencies have stabilised.

For the entire interview, watch the accompanying video

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