HDFC Bank, ICICI Rise as Nomura Projects Banking Sector Resilience Ahead of Q1 Earnings Blitz

HDFC Bank, ICICI Rise as Nomura Projects Banking Sector Resilience Ahead of Q1 Earnings Blitz​

Banks are bracing for a challenging quarter, with market sentiment leaning towards resilient loan growth but facing moderated pressure on profitability margins. A detailed earnings preview from Nomura suggests that while lending momentum remains strong across the sector, higher operational costs and deposit trends will curb outright profit expansion.

The brokerage anticipates core pre-provision operating profit (PPOP) growth averaging 12% year-on-year for banks under its coverage. This uplift is expected to be primarily driven by a robust 9% growth in net interest income (NII), complemented by effective control over operating expenses.

Profitability Dynamics and Margin Outlook​

While the sector looks fundamentally strong, Nomura projects that profit after tax (PAT) expansion will likely remain muted at a 6% year-on-year rate. This tempering factor is attributed to seasonally elevated credit costs observed in the quarter.

Nomura confirmed that loan growth momentum remains intact across the board. However, performance among individual lenders is expected to be highly varied, depending on their specific loan mix and overall liability strength rather than firm ownership status.

Pressure Points: NIM Decline and Deposit Costs​

A "mild-to-moderate" net interest margin (NIM) decline is anticipated for most covered banks. The pressure is projected to be sharper for Axis Bank and Bank of Baroda due to elevated deposit costs and a shift in lending focus towards lower yielding loan segments.

Federal Bank, conversely, stands out as an exception amid the expected industry-wide NIM adjustments. Softer government bond yields are also forecast to provide a treasury boost, particularly benefiting public sector banks after losses incurred in the preceding quarter.

Asset Quality Stability and Funding Challenges​

Nomura expects asset quality across the banking landscape to remain broadly stable for the near term. This stability is underpinned by easing stress levels in unsecured retail and microfinance lending portfolios.

However, the brokerage highlighted a significant risk factor looming over the second half of FY27: a delayed and uneven monsoon. This weather-related uncertainty poses a particular threat to rural, MSME, and commercial vehicle loan book performance.

Funding Gaps and Strategic Recommendations​

The outlook also suggests that deposit growth will continue to lag behind credit generation in the immediate future, keeping credit-deposit ratios elevated. The introduction of Reserve Bank of India's FCNR(B) deposit measures is expected to help narrow this funding gap starting from September.

In line with these forecasts, Nomura has named HDFC Bank, ICICI Bank, and Kotak Mahindra Bank as its preferred picks in the banking sector. Notably, HDFC Bank has taken the place of Axis Bank in the brokerage's top recommendations.