FCNR inflows to weigh on bank NIMs but drive EPS upgrades: Report

The brokerage house noted, in July, system loans grew 19.3 per cent year-on-year (YoY) and 0.7 per cent month-on-month (MoM) in July 2026. While YoY growth remained strong across most segments, excluding housing and unsecured loans--which are showing signs of improvement--MoM growth was primarily driven by the gold loan and micro, small and medium enterprise (MSME) segments.

If we look at the numbers, as of August 15, system loan and deposit growth stood at 18.3 per cent and 14.7 per cent YoY, respectively, while the loan-to-deposit ratio (LDR) eased to 81.7 per cent from a recent peak of 83.4 per cent.

"We expect FCNR flows to add ~3ppt to system deposit gr. (13.5% in FY27E) and 3.7ppt to loan gr. (16.1%)," the brokerage house noted.

The brokerage expects fresh spreads to widen for private sector banks (PVBs) but narrow for public sector banks (PSBs). It noted, outstanding spreads for public sector banks (PSBs) improved by 2 basis points (bps) against the first-quarter FY27 average, while fresh spreads declined by 6 bps, driven by a 10-bps increase in fresh weighted average term deposit rates (WATDR).

At the same time, private banks saw a 4-bps decline in outstanding spreads, led by a 5-bps decline in outstanding weighted average lending rates (WALR), while fresh spreads improved by 4 bps.

Going forward, IIFL Capital expect improving margins, excluding the impact of FCNR inflows, supported by 5-45 bps month-on-month increases in fresh lending rates across most segments, despite a 1-12 bps decline in retail lending rates, noting median marginal cost of funds-based lending rate (MCLR) also rose by 10 bps MoM, with around 5-35 per cent of banks' loans linked to MCLR, while select banks are yet to complete their term deposit (TD) repricing.

"We believe FCNR will be NIM dilutive (can contract 3-15bps), but drive EPS upgrades of 1-3%," it said. (ANI