New Delhi, October 11 (ANI): A 25-basis-point repo rate hike by the Reserve Bank of India (RBI) could expand large banks’ net interest margins (NIMs) by up to 10 basis points and raise earnings-per-share (EPS) estimates by as much as 5%, according to a report by IIFL Capital.
The Monetary Policy Committee (MPC) unanimously raised the repo rate by 25 basis points to 5.5% and shifted its policy stance from “neutral” to “calibrated tightening.”
The brokerage estimates that a 25-basis-point rate hike could expand the net interest margins of larger banks by 6 to 10 basis points and boost EPS estimates by 3% to 5%.
“Our sensitivity analysis suggests a 25bps rate hike should drive 6-10bps NIM expansion and 3-5% EPS upgrade for larger banks,” the report said, adding that public sector banks “will see lower NIM expansion; pass-through to EPS will be higher.”
Looking ahead, the report said earnings-per-share growth in India’s banking sector could accelerate to a compound annual growth rate (CAGR) of 20% over fiscal years 2026-28, compared with the current estimate of 14%, if the RBI raises interest rates by a cumulative 50 basis points.
Regarding the transmission of higher interest rates, the brokerage noted that banks with a larger share of repo-linked loans are likely to benefit from faster loan repricing.
“The banks with a higher share of repo-linked loans…should see faster loan repricing vs. fixed rate lenders,” it said.
Meanwhile, the report highlighted tightening liquidity conditions in the banking system, noting that liquidity had declined from a recent peak of 11 trillion rupees to 5 trillion rupees, equivalent to around 2% of net demand and time liabilities (NDTL).
It expects liquidity to tighten further due to increased currency circulation and regulatory measures, including U.S. dollar sell-buy swaps, variable rate reverse repo (VRRR) operations, open market operation (OMO) sales and foreign exchange market interventions.
Consequently, the weighted average call rate (WACR) and three-month certificate of deposit (CD) rates are expected to rise gradually. The rates have declined by 15 basis points and 100 basis points, respectively, since the announcement of the Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit window.
On banking sector valuations, the report noted that mid-sized banks’ valuations had risen by 5 to 25 percentage points so far this calendar year, while public sector banks had seen declines of 5 to 25 percentage points. Against this backdrop, large private sector banks offer a relatively more attractive risk-reward proposition, according to the report.
“Mid-size banks have re-rated 5-25ppt CYTD vs 5-25 ppt de-rating for PSU banks and HDFC and unchanged for large Pvt banks. Thus, risk-reward is more attractive for larger banks,” it said. (ANI)
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