Synopsis: Nomura India’s report highlights the impact of potential repo rate cuts on banks’ Net Interest Margins (NIMs). Most major private banks could see a 15-20 basis points hit on NIMs with a 50-basis-point rate cut. SBI, IndusInd Bank, AU Small Finance Bank, and Bandhan Bank are expected to face a lesser impact due to their loan structures.
Nomura India’s latest report sheds light on how Indian banks are expected to be impacted by potential rate cuts in the near future.
Prominent banks such as HDFC Bank, Kotak Mahindra Bank, Axis Bank, ICICI Bank, Federal Bank, Bank of Baroda (BoB), SBI, AU Small Finance Bank, IndusInd Bank, and Bandhan Bank have 30-60% of their loan books directly linked to the repo rate, which exposes them to changes in the interest rate environment.
Impact of Rate Cuts on NIMs and Profitability:
Nomura India’s analysis reveals that a 50-basis-point cut in the repo rate could dampen sector-wide Return on Assets (RoA), affecting the profitability of large private banks.
These banks, with significant portions of their loan books linked to external benchmarks such as the repo rate, are highly exposed to rate fluctuations.
For private banks like ICICI Bank, Axis Bank, and HDFC Bank, a potential earnings per share (EPS) reduction of 3-6% in FY26 is expected due to the cut's impact on NIMs.
On the public sector side, SBI, which has a large proportion of MCLR-linked loans, is somewhat better insulated, though it still faces a 6% reduction in EPS owing to its lower RoA.
Liabilities and Loan Structures:
Banks’ liabilities are fixed-rate in nature and only reprice upon maturity.
With only 14-22% of term deposits maturing in less than one year, the impact of rate cuts is cushioned but still felt.
Smaller banks like IndusInd Bank, AU Small Finance Bank, and Bandhan Bank are better positioned with a higher share of fixed-rate loans, limiting the effect on NIMs.
However, these smaller banks are more vulnerable to a rise in credit costs among their customer base, making Nomura cautious in changing stock recommendations based solely on NIM implications.
Larger banks, with strong valuation and asset quality, remain more attractive.
Price Target Adjustments:
Nomura has revised down its price targets for Axis Bank, SBI, and Bank of Baroda, reflecting concerns over declining RoE. The new price targets are Rs. 1,370 for Axis Bank (from Rs. 1,435), Rs. 980 for SBI (from Rs. 1,030), and Rs. 280 for Bank of Baroda (from Rs. 310).
Sector Outlook:
The broader banking sector continues to show strong long-term potential, with a robust Return on Equity (RoE) cycle and attractive valuations. However, Nomura notes that immediate outperformance in the sector is difficult to foresee given current macroeconomic conditions.
In conclusion, Nomura’s report underscores the sensitivity of Indian banks, particularly larger private players, to repo rate cuts.
While smaller banks may experience less impact on NIMs, their exposure to higher credit risks remains a concern.
In contrast, larger banks like ICICI, Kotak, and SBI offer stability with stronger deposit franchises and asset quality.
Nomura’s adjusted price targets reflect these dynamics, reinforcing its preference for bigger names in the sector.
Disclaimer: This article is for informational purposes only and should not be taken as investment advice. Readers are encouraged to seek guidance from a financial advisor before making any investment decisions.
