Bank stocks under pressure as analysts trim earnings, targets on NIM concerns

ET Intelligence Group: Analysts have reduced earnings growth forecasts and cut target prices for banking stocks for FY27 citing mounting pressure on net interest margins (NIMs) as funding cost is expected to stay high amid slowing deposit growth. The NIM recovery has remained tepid with only four banks from a sample of 29 reporting a year-on-year improvement in margins in the December 2025 quarter compared with 10 banks in the year-ago quarter.

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The ET Banks index has lost nearly 6% in 2026 so far, reflecting weakness in the broader market where the benchmark BSE Sensex has lost 10%.

While growth in deposit accretion by banks improved in the December 2025 quarter to 12.7% from a range of 9-11% in the previous six quarters, it failed to match the growth in credit offtake which spurted to 14.5% from a range 9-13% by similar comparison.

In the fourth quarter of FY26 till March 15, while credit growth remained firm at around 14%, the deposit growth skidded to under 11%. Earlier ET had reported that the fixed deposits mobilised by banks for the December quarter were at a two year low of ₹3.2 lakh crore while growth in total deposits decelerated to 11% from 14% in the year ago period, reflecting increasing struggle for banks to attract deposits amid rising credit demand.

Analysts have expressed concerns over the increasing credit offtake relative to interest bearing liabilities (IBL) and total deposits amid dwindling high-quality liquid assets represented by liquidity coverage ratio (LCR) and net stable funding ratio (NSFR).

“Looking into FY27, elevated credit/IBL (around 77% in the December quarter), CD ratios (over 86%) and declining LCR/NSFR ratios for our coverage continue to indicate increasing reliance on higher-cost funding and, hence, pressure on NIMs,” noted JM Financial Institutional Securities in a sector report. The broking firm has undertaken broad-based earnings cuts across banks in its coverage for FY27-28 and reduced valuation multiples thereby driving down target stock prices by 3-19%.

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Motilal Oswal Financial Services has marginally reduced the annualised earnings growth to 16.1% for FY26-28 period for the banks under its coverage from the earlier expectation of 16.5% growth. The broker has reduced earnings estimated by 0.8-1.3% for three years to FY28.

“With competition for deposits remaining intense, banks continue to face challenges in mobilising low-cost deposits,” the broker mentioned in a report. It expects term deposit rates to remain sticky given the continued pressure on low-cost deposit mobilisation.