Just 4 banks lead as Nifty Bankex outperforms other indices in Q12025, but analysts expect gradual recovery; should you invest? Analysts project muted margins for March 2025 due to deposit competition but anticipate a good recovery in the second half of 2025-26
The Nifty Bank index outperformed major equity indices in the first quarter of 2025, emerging as the second best NSE sector performer after Nifty Metals. It gained 1%, while the Nifty 50 and Nifty 500 fell 0.9% and 5.1%, respectively, based on closing values from 1 January to 28 March 2025. However, Nifty Bank’s gains were uneven, driven solely by four heavyweight private banks, while the other eight saw price declines. Six of these underperformed the Nifty 500 in the first three months of 2025.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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Why uneven performance?
The sector faces challenges like weak deposit growth, net interest margin (NIM) pressures, higher provisioning, and rising credit costs. NIMs are under pressure due to high deposit rates, modest loan growth, and a record high loan-to-deposit ratio (LDR) of 80.5%, as per Motilal Oswal. A high LDR forces banks to raise deposit rates, squeezing margins. NIM is the gap between interest earned and interest paid. Rising term deposit rates and stress in microfinance and unsecured retail loans are limiting loan growth. Higher delinquencies lead to increased provisioning, hurting profitability.March quarter view
Reports by Motilal Oswal, Elara Capital, and IIFL Capital project weak sector performance. IIFL sees a year-on-year earnings decline in its banking coverage, while Motilal Oswal and Elara expect steady growth for PSU banks. Motilal also expects earnings to dip for private banks. The margins are likely to stay muted in March 2025 due to intense deposit competition. Loan growth slowed to 11.1% from 12.5% in the December 2024 quarter, while deposit growth fell to 10.2% year-on-year. The transmission of repo rate cuts by RBI will lead to lower lending rates, which, coupled with sticky deposit rates, will continue to create margin pressure. However, the benefit of the cash reserve ratio cut by RBI (in December last year) will provide some support.Medium to long-term prospects
Analysts expect a gradual recovery in margins from the second half of 2025-26, led by repricing of loans and deposit rates and benefits from the RBI’s liquidity improvement initiatives, like open market operations and forex swaps. An Anand Rathi report notes easing credit card delinquencies and slower deposit rate hikes. It expects improved liquidity to boost credit growth from the second half of 2025-26. Moreover, tax benefits from the budget and strong government capex are expected to boost consumption and drive credit growth. Ambit Capital sees asset quality issues as seasonal, not structural. It also notes that large private and public sector banks have adequate capital to support growth. Most analysts are bullish on ICICI Bank, Axis Bank, and State Bank of India.
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ICICI Bank
The story so farThe bank registered an impressive loan growth of 17% CAGR between 2021-22 and 2023-24 supported by healthy growth in small and medium enterprises, retail and corporate segments.The asset quality is good with healthy capitalisation.The substantial investments in tech and digital platforms and strong branch network help in attracting deposits.What lies ahead
The business growth is expected to remain healthy, and asset quality is expected to improve in the March 2025 quarter. Growing competition in deposits will keep margins subdued in 2025-26. However, a likely uptick in loan growth will boost NIMs in 2026-27.Analysts’ talk
MOTILAL OSWAL: The bank is poised for strong performance with healthy loan growth, solid asset quality, and a RoE target of 17% by 2026-27.
BNP PARIBAS: The bank leads in credit growth. It will get an earnings boost from the unwinding of provisions.
Axis Bank
The story so farThe bank is boosting its retail presence by growing in rural and small business segments.The benefits from the acquisition of Citigroup’s India retail portfolio and investments in technology will continue.The conservative provisioning policy will safeguard the bank from rising stress in personal loans and credit cards.What lies ahead
The bank may see muted growth in loans and deposits in the March quarter and may report a marginal growth in NIMs.The volatility in the asset quality will continue in the first half of 2025-26. However, improved liquidity will lead to normalisation in the second half of 2025-26.The bank may have to go for a capital raise to address its weak adequacy levels (measures a bank’s financial health and stability).Analysts’ talk
AMBIT CAPITAL: Near-term growth and asset quality concerns are priced in. Future capital raise may hit RoE but improve valuations.
ANAND RATHI: The improvement in the macro environment (liquidity improvement, easing of stress in unsecured retail, consumption growth) and focus on the rural segment will bode well for the bank.
State Bank of India
The story so farThe bank has transformed from a corporate lender to a diversified retail segment over the past few years.Digitisation and branch rationalisation boosted its operational efficiency.The asset quality is stable as government and top corporate employees form the majority of its unsecured loan customers.What lies ahead
The bank is expected to report good numbers for the March 2025 quarter, aided by treasury gains and fee income.The bank has a significant proportion of its loan book linked to MCLR (Marginal Cost of Funds based Lending Rate), which safeguards it from repo rate cuts.The bank suffers from weak adequacy that will necessitate a capital raise in the future.Analysts’ talk
AMBIT CAPITAL: SBI is the only PSU bank capable of sustaining market share and competing with large private peers based on product diversity and dynamic management practices. RoE is expected to average 15.5% over 2025-26 and 2026-27.
MOTILAL OSWAL: SBI remains well-positioned for sustainable growth.
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This story originally appeared on: India Times - Author:Faqs of Insurances
