Speaking to ET Now, Gundlapalle said that the latest provisional numbers show system-wide loan growth accelerating to around 12–13%, a clear improvement from the 10% levels seen in mid-September — and much earlier than anticipated.
“This growth is a positive surprise. However, before celebrating, we must wait to see how margins have fared this quarter — especially given the impact of rate cuts and the relative performance between public and private sector banks,” he said.
Credit growth up, margins in focus
While the pickup in loan growth signals improving demand, Gundlapalle emphasized that net interest margins (NIMs) will be the key metric to watch. The sector’s profitability could be tested as lending rates adjust faster than deposits in a falling rate environment.
He added that banks are likely managing deposit growth strategically to protect margins.
“Deposit growth looks soft compared to loan growth, but I wouldn’t worry. Banks are optimizing their loan-to-deposit ratios (LDR) to defend NIMs, and with RBI maintaining a surplus liquidity stance, we’re not in the same situation as 12–18 months ago,” Gundlapalle noted.
Earnings outlook: Positive bias ahead
With liquidity supportive, Gundlapalle expects a positive bias to earnings in FY26.“The full impact of surplus liquidity isn’t priced in yet. If consumption credit picks up, we could see a meaningful upside surprise on the earnings front,” he said.
Private banks: HDFC, ICICI, and Axis in Focus
On large private banks, Gundlapalle remains constructive but selective.
HDFC Bank tops his list due to its balance-sheet repair phase and idiosyncratic tailwinds.
“A slower growth environment actually helps HDFC Bank as it focuses on fixing its merged book. Its ROA could improve even as peers face margin pressure,” he said.
ICICI Bank, while leading in profitability, may have limited headroom for re-rating.
“ICICI’s metrics are outstanding, but it’s at peak profitability. Upside from here looks capped,” Gundlapalle said.
He also sees Axis Bank as a potential rebound candidate.
“Axis has already seen a significant de-rating. If we see stability in asset quality and modest growth pickup, the risk-reward looks favourable,” he added.
Kotak Mahindra Bank, on the other hand, faces challenges.
“Growth has been fine, but margins and credit costs have disappointed. We’d like to see more stability before turning positive,” he noted.
For SBI, Gundlapalle said valuations are attractive, but the NIM trend needs to stabilize before it becomes compelling.
NBFCs: Gold lenders and housing finance in spotlight
Turning to non-bank financial companies (NBFCs), Gundlapalle said the picture is mixed.
Bajaj Finance will be watched closely for its credit cost performance, following investor concerns last quarter.
“If credit cost stays below 200 bps, it will be a positive surprise. Growth was in line, but profitability is the key watch point,” he said.
In contrast, Muthoot Finance and Manappuram Finance continue to benefit from rising gold prices and a shift in borrower preference.
“With microfinance growth slowing and gold prices rising, gold loan NBFCs are seeing both higher volumes and better yields. We remain bullish here,” Gundlapalle added.
He also highlighted affordable housing finance as another promising NBFC segment that should benefit from lower interest rates and improving liquidity.
PSU banks vs private banks: Margin trade-off matters
Despite strong growth numbers from public sector banks (PSBs), Gundlapalle prefers private lenders for now.
“PSU banks have grown faster and even shown better earnings growth, but it’s come at the expense of margins,” he explained.
According to Bernstein’s analysis, PSU banks have lost 30–35 basis points of NIM in the past year, versus less than 10 bps for private banks.
“If PSBs can sustain 10–11% growth while maintaining NIMs at current levels, they’ll become more attractive. Until then, private banks offer a better balance of growth and profitability,” Gundlapalle said.
Positive sector bias, but watch margins
With credit growth surprising on the upside and liquidity improving, Gundlapalle remains constructive on the banking and NBFC sector for FY26.
“This is a healthy setup — growth is accelerating, liquidity is strong, and the macro backdrop is stable. But the key differentiator this quarter will be margins and asset quality,” he concluded.
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