The banking sector is approaching the soil; Growth and margin recovery can start at H2: Pranav Gundlapalle

The Indian banking sector may be close to turning a corner to make a corner, according to Pranav Gundlapalle, senior research analyst at Sanford C Bernstein. After months of slower credit growth and margin pressure, he believes that both growth and profitability can start to improve compared to the second half of the current financial year.

Credit growth delay relaxation

Credit growth in the sector has been strongly assumed in the past year – from 16% in May 2024 to now around 10%. Gundlapalle said the decline shows that banks are at the bottom of the cycle. He expects a modest recovery, with credit growth that will probably rise to 12-13%by the end of FY26.

“NBFCs and mortgages will lead this recovery in credit growth, supported by falling interest rates. Retainations may not immediately benefit from GST cuts, but better consumer portfolios should help later in the year,” he noticed.

Margins to recover after reducing the rate reduction

The net interest rate margins (NIMs) came under pressure because banks adjust the loan interest after 100 basic points of tariff reductions. Gundlapalle said that the majority of the pain will be visible towards the end of the second quarter, after which Deposito -Herpractie will support the margins. “We expect that the margins will be followed in the second quarter or the second quarter of the second quarter, followed by sequential improvement. Even if there is still a rate reduction, lower depositing costs must be the impact,” he explained, “he said.

Public vs Private Banks: a price battle

Public sector banks (PSBs) have grown loans faster than private colleagues, largely due to aggressive prices. In the long term deposits, PSBs offer 30-40 basic points higher rates, while on mortgages they are lower than private banks.

This strategy has helped PSBs to get market share, but Gundlapalle warned that it could harm profitability. “The growth at the expense of margins is not sustainable. Investors should not reward such growth, and if the price of aggression continues, it could weigh in the income of the entire sector,” he said.

He added that although PSBs show faster growth in the loan, banks in the private sector remain a safer gamble from an investment perspective due to stronger balance sheets and better margin protection.

Valuation gap will probably not close quickly

Traditional acting private banks with a premium to PSBs. Although there is a risk of valuation pressure on private banks as aggressive prices, Gundlapalle said that a large re-rating of PSBs is unlikely.

“For PSBs, the big question is what happens as soon as ultra-loose credit costs and treasury profits fade. Sustainable growth with stable returns still has to be seen,” he noticed.

Patience

After the growth of the Gedempte Loan, weaker margins and slightly higher credit costs, at the third or fourth quarter, both the growth of the loan and the margins should start to recover.

“The ratings in the banking sector are much cheaper compared to the wider market. Investors may have to wait a few quarters, but the recovery story is intact,” said Gundlapalle.