Santanu Chakrabarti, India Analyst for Banking, Financial Services, and Insurance (BFSI) at BNP Paribas, highlighted a favourable shift in banking fundamentals. With the Reserve Bank of India’s (RBI) policy actions creating liquidity tailwinds and fixed deposit repricing already underway, Chakrabarti expects a steady improvement in margins.Notably, he foresees a meaningful pickup in Current Account Savings Account (CASA) levels and predicts that most large banks will exit fiscal year 2025-26 (FY26) with better margins than the previous year.Below are the edited excerpts of the interview.
Q: For banks as a whole, how do you see the margins moving? This quarter, it is going to be jacked because of the double rate cut and Q2 may be even worse, isn’t it?A: Whether margins bottom out in Q1 or Q2 depends a bit on the mix of repo-linked loans, which are adjustable within the first month versus over a two-to-three-month period. Some adjustments will fall in this quarter, and some in the next. So between Q1 and Q2, there might be a slight erosion in margins, varying from bank to bank. But by Q2, margins will have bottomed, and from then on, they should become a tailwind.Q: For typical banks like HDFC or SBI, will margins in Q4 of FY26 be better than Q4 of FY25?A: Yes, we expect that by the end of FY26, exit margins for most large banks will be better than the previous year. The arithmetic is simple: worst-case, there is a 15–20 basis point margin impact between this quarter and the next. But from that point on, you start seeing 4–5 basis points (bps) of quarterly expansion. By the end of FY26, you should see a meaningful impact on the bottom margins for the individual banks.To illustrate, we ran a small exercise on the impact of the earlier 50 basis point FD rate cut — it reprices back books by about 15 bps on average. That’s a robust figure, especially since most large banks now have over 50% of their liabilities in fixed deposits. CD rates are also low (around 6.2%), and their repricing should be done in 1–2 months. All these are tailwinds. We also expect a CASA pickup.Q: Does the CRR cut benefit banks like SBI and HDFC Bank the most, simply because they have the largest deposit base?A: Yes, that’s one part of it. The second part of this is what does it mean for the overall balance sheet? Does it mean a little more deployment on the investment side, does it mean a little more conservatism as to what rates you pay on your deposits but would it mean greater credit?Also Read | Room for more rate cuts if inflation holds, say RBI MPC members Ram Singh and Nagesh KumarI think it will be a combination of all three because that is simply how liquidity works. We are yet to see a meaningful acceleration in credit growth — it’s around 9.9%. our expectation is that within the next two to three months, this excess liquidity, especially with the promise of that entire number coming between September and November, loan growth should start to pick up, and that’s where a lot of the positive surprises should come from.Q: On loan growth — bankers say there’s a borrower problem. Corporates are borrowing via bonds or using internal accruals. Retail is restricted by the Reserve Bank of India (RBI) on unsecured credit. So, where do banks lend? Micro, Small, and Medium Enterprises? Can they absorb this much credit?A: MSMEs are about 15–17% of loan books, and growth is strong there, with no major headwinds. Our system-wide credit growth forecast for the full year is 13%, which includes about 7–7.5% from corporate loans. It is hard to pinpoint when capex will pick up, given global macro uncertainties.On retail, growth rates were sharply pulled back in unsecured loans over the last three quarters of the previous financial year. So from this quarter onwards, year-on-year (YoY) comparisons will look better due to a lower base. That makes 15% retail growth possible — both in mortgages and on the other side.Q: Some economists say infrastructure loans could be the next big driver, especially with government focus on roads, rail, and irrigation. What’s your view?A: Two main headwinds for infrastructure loans. First, from recent memories, banks prefer to let specialist non-banking financial companies (NBFCs) handle those now. Second, the proposed provisioning norms. If they pass, infrastructure loans will require upfront provisioning almost equal to a potential non-performing assets (NPAs) — very tough from an accounting perspective. We have factored this into our 13% system growth estimate.Q: Now let’s talk about your top picks. What is your hierarchy of buys among banks and NBFCs?A: HDFC Bank remains our top pick. Its current valuation doesn’t fully reflect the margin improvement story. HDFC Bank and Axis Bank are most sensitive to easing on the liability side and should benefit over the next 4–5 months. Among NBFCs, we still prefer Bajaj Finance — others look a bit stretched in valuation compared to top banks. There’s a strong case for HDFC Bank at current prices.Also Read | Axis Bank’s Neelkanth Mishra expects India’s growth recovery within monthsQ: Your target prices?A: For HDFC Bank: ₹2,770
For Bajaj Finance: ₹11,120Q: In the near term, do NBFCs have a trading edge over banks? And should we focus more on ROA than margins given the peculiarities of EBLR?A: ROA is the ultimate profitability measure – it’s a great metric, as long as leverage isn’t a concern. PSU banks on one side and even Kotak Mahindra Bank, which has too much equity, represent the extremes. In general, for most banks, margins and ROA will move together unless there’s a credit event.As for NBFCs — yes, their margins are better protected in the near term. Most top NBFCs have margins between 800–1,000 bps, and about 40-45% of their borrowing is from banks. A 20-bps movement is relatively small compared to their total margin. But the better filter for NBFC performance is asset quality, not just margins. Growth and credit quality will matter more.For more, watch the accompanying video
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