Banks, NBFCs set for strong Q2 growth, lower funding costs may aid margins: Bernstein

Banks and non-banking financial companies (NBFCs) are likely to sustain strong growth in the second quarter, while lower wholesale funding costs could help keep margins stable or even support a modest sequential improvement, according to Pranav Gundlapalle, Director and Senior Research Analyst at Bernstein.

“Given that we've had fairly healthy liquidity conditions, plus we had the FCNR flows, we would expect the wholesale deposits or wholesale funding costs to have moderated, and therefore margins to be stable or even show a slight improvement sequentially,” Gundlapalle said.

However, headline earnings numbers could be affected for some banks that received significant FCNR flows. While this could create some distortion in reported metrics, Gundlapalle expects core earnings and net interest income (NII) to remain healthy.

At an aggregate level, Gundlapalle said the banking sector continues to show a combination of strong growth, healthy margins and benign asset quality.

He added, “The key controversy and the one to watch out for is how the market share dynamics play out between the public and private sector banks, where the expected credit loss (ECL) transition, so more colour we get on how that's going to impact the public sector banks, becomes the key kind of an inflection point for the sector over the next few quarters. But leaving that aside, at an aggregate level, things do look pretty attractive at this point.”

On MDR, Gundlapalle said the introduction of a merchant discount rate on UPI has created a sizeable revenue pool for banks and fintechs, with limited risk of users shifting back to cash.

He said the risk is mainly among mid-sized merchants, but the largest merchants account for a disproportionate share of payment value, which means the overall revenue pool is likely to remain largely protected.

He also pointed to rising ATM costs for consumers and the availability of transaction-linked credit for merchants as factors that could discourage a return to cash. Bernstein estimates the UPI payment revenue pool at around ₹27,000 crore by FY28.

Leadership changes at some large private sector banks could also influence the sector narrative. Gundlapalle highlighted HDFC Bank as an important case, with the leadership transition potentially helping address concerns around governance and providing greater clarity on the bank's longer-term direction.

For Kotak Mahindra Bank, the impact of a leadership change could be different. A new CEO delivering sustained growth above the system level could potentially influence the bank's growth trajectory, according to Gundlapalle.

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