Indian bank stocks have already priced in strong credit demand. The more important question for the market now is whether funding costs will ease fast enough to stabilise margins and revive earnings momentum in FY27. BNP Paribas believes large private lenders are approaching that inflection point.
The brokerage expects system-wide credit growth of 13% in FY27, with bank credit expanding 18.2% year-on-year as of October 15. However, the sharper focus for investors is the margin cycle. Deposit rates have been easing through September, while lending yields appear to be flattening, creating conditions for net interest margins (NIMs) to stabilise or expand modestly from the second half of FY27.
For banks, loan growth alone may not be enough to drive a stock re-rating if deposit costs continue to rise. BNP Paribas' thesis is that the worst of the pressure on funding costs may be behind large lenders, allowing earnings growth to improve without relying on aggressive loan pricing.
Recent quarterly results have highlighted this tension. HDFC Bank's net interest margin fell 10 basis points sequentially to 3.16% in Q2 FY27, while ICICI Bank's margin declined 12 basis points to 4.18%, even as both lenders reported healthy profit growth. The market has treated margin pressure as a key reason to remain selective despite robust headline earnings.
If deposit repricing catches up with lending yields, the earnings upgrade cycle could broaden beyond banks with exceptionally strong fee income or low-cost deposits.