“The rate hike would directly lead to an increase in external benchmark-linked lending rate for banks,” said Asutosh Mishra, head of research at Ashika Stock Broking. “The FCNR(B) scheme has now also taken care of the deposit problem because banks were struggling to keep pace with credit growth. All in all this is a positive for banks in the medium term with benefits accruing for at least six months.”
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Expectations are that the RBI will hike its benchmark repo rate by 25 basis points amid rising global rates and higher inflation. This will be the first rate hike since February 2023 and could automatically increase interest rates linked to the repo rate.
Strong loan growth of more than 19% means banks have enough avenues to deploy the $133 billion (Rs 12,700 crore) raised through the FCNR(B) window.
Macquarie Research analysts Suresh Ganapathy and Dev Shah expect banks to deliver 18% earnings per share (EPS) growth, driven by a 15-basis-point rise in margins in the fiscal year ending March 2028. One basis point is 0.01 percentage point.
Macquarie has upgraded Kotak Mahindra Bank and (BoB) to outperform from neutral.
“Private banks should deliver strong EPS growth in the next two years as margins improve and operating expenses and credit costs fall,” the analysts said. “The macroeconomic backdrop remains supportive: post-FCNR mobilisation has eased liquidity constraints, loan demand is robust and broad-based, asset quality remains healthy, and rate increases appear imminent.”
Macquarie expects 75 basis points of rate hikes in the next nine to 12 months, which will support further margin expansion.
Macquarie expects private sector banks to benefit more, with 45% to 60% of their loan book linked to the repo rate or external benchmark rate, which means as rates go up, margins will go up. The brokerage has mentioned large lenders like and as top picks, besides City Union, Kotak and BoB.
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Analysts said that with asset quality remaining fairly stable and credit growth strong, the only risk for banks is if they do not get sufficient higher-yielding loans to lend to.
“Even public sector banks will benefit because increasingly all retail and MSME loans are linked to the repo rate. All these loans will be repriced instantly. The only risk is some of the banks, which have garnered a huge amount of deposits, may need to lend to companies at a lower yield, which will not be the most efficient way to lend margin-wise,” said Yuvraj Choudhary, research analyst at Anand Rathi Securities.
ICICI with $17.88 billion and HSBC with $14.5 billion are the top two banks to garner FCNR(B) deposits.
A supportive macroeconomic backdrop and robust loan demand should help banks capitalise on easier liquidity following FCNR mobilisation.
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