Speaking to CNBC-TV18, Shah said the recent cuts in savings and term deposit rates by several banks will provide some cushion, but not enough to offset the overall impact of falling interest rates. “With further 50 basis points of repo rate cuts on table, we’ll see more margin pain in the coming quarters for the banks,” he said.
He explained that typically, a 25 basis point repo rate cut leads to 8–9 basis points of margin contraction in the first year. However, with savings account rate cuts, “this 7–10 basis point of margin contraction goes down to 5–6 basis points,” he said.
One basis point is one-hundredth of a percentage point or 0.01%.
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Shah expects this pressure to continue through the whole of FY26. “FY26 margin pain is likely to stay—partly due to rate cuts in the first half, and subsequently in the second half, even the MCLR-linked loan book will see lower pricing.”
Private sector banks could feel the impact earlier than public sector lenders due to their higher share of repo-linked loans. “Private sector banks typically have around 50–55% of their loan book linked to EBLR, which is largely T-bills and repo-linked loans,” he said. On the other hand, PSU banks have a larger proportion of their book linked to MCLR, which adjusts more gradually.
Despite margin pressures, Shah expects some relief from lower credit costs in the second half of FY26.
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On the upcoming Q4 results, he flagged a weak quarter for the sector overall. “We are forecasting PATs to de-grow 7% year-on-year and grow only 1% quarter-on-quarter,” he said. Slower loan growth, margin contraction and elevated credit costs are expected to weigh on earnings.
Among private banks, Shah expects ICICI Bank and HDFC Bank to report better-than-expected numbers when they release their results on April 19. For PSU banks, Bank of Baroda is seen as a potential outperformer, while Federal Bank, RBL Bank, and IndusInd Bank may miss consensus estimates.
He also noted that despite the recent rally, banking may underperform in the near term. “Given that we are now talking about a bigger rate cut cycle and the earnings growth for banking sector in the entire FY26 is at best going to be low single digit, the banking sector can take a breather in the near term.”
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Shah sees high-growth non-banking financial companies (NBFCs) as better positioned than banks during this period.
First Published: Apr 17, 2025 12:16 PM IST
