Credit growth slowdown easing
Credit growth in the sector has slipped sharply over the past year—from 16% in May 2024 to about 10% now. Gundlapalle said the decline shows banks are at the bottom of the cycle. He expects a modest recovery, with credit growth likely to rise to 12–13% by the end of FY26.
“NBFCs and mortgages will lead this recovery in credit growth, supported by falling interest rates. Retail loans may not benefit immediately from GST cuts, but better consumer wallets later in the year should help,” he noted.
Margins to recover after rate cut impact
Net interest margins (NIMs) have come under pressure as banks adjusted lending rates following 100 basis points of rate cuts. Gundlapalle said most of the pain will be visible by the end of the second quarter, after which deposit repricing will support margins.“We expect margins to bottom out in Q2 or Q3, followed by sequential improvement. Even if another rate cut comes early next year, lower deposit costs should cushion the impact,” he explained.
Public vs private banks: a pricing battle
Public sector banks (PSBs) have been growing loans faster than private peers, largely due to aggressive pricing. On term deposits, PSBs are offering 30–40 basis points higher rates, while on mortgages they are pricing lower than private banks.
This strategy has helped PSBs gain market share, but Gundlapalle warned it could hurt profitability. “Growth at the cost of margins is not sustainable. Investors may not reward such growth, and if pricing aggression continues, it could weigh on the entire sector’s earnings,” he said.
He added that while PSBs are showing faster loan growth, private sector banks remain a safer bet from an investment perspective due to stronger balance sheets and better margin protection.
Valuation gap unlikely to close soon
Traditionally, private banks trade at a premium to PSBs. While there is a risk of valuation pressure on private banks if aggressive pricing continues, Gundlapalle said a major re-rating of PSBs is unlikely.
“For PSBs, the big question is what happens once ultra-low credit costs and treasury gains fade. Sustainable growth with stable returns is yet to be seen,” he pointed out.
Patience needed
After muted loan growth, weaker margins and slightly higher credit costs, by the third or fourth quarter, both loan growth and margins should start recovering.
“Valuations in the banking sector are much cheaper compared to the broader market. Investors may need to wait a couple of quarters, but the recovery story is intact,” Gundlapalle said.
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