Banking stocks: The next trigger may be margins, not loan growth

However, the sharper focus for investors is the margin cycle. Deposit rates have been easing through September, while lending yields appear to be flattening, creating conditions for net interest margins (NIMs) to stabilise or expand modestly from the second half of FY27. Why the margin call matters For banks, loan growth alone may not be enough to drive a stock re-rating if deposit costs continue to rise.

BNP Paribas' thesis is that the worst of the pressure on funding costs may be behind large lenders, allowing earnings growth to improve without relying on aggressive loan pricing. Recent quarterly results have highlighted this tension. HDFC Bank's net interest margin fell 10 basis points sequentially to 3.16% in Q2 FY27, while ICICI Bank's margin declined 12 basis points to 4.18%, even as both lenders reported healthy profit growth.

The market has treated margin pressure as a key reason to remain selective despite robust headline earnings. If deposit repricing catches up with lending yields, the earnings upgrade cycle could broaden beyond banks with exceptionally strong fee income or low-cost deposits. Liquidity is supportive, not abundant Another concern weighing on rate-sensitive financial stocks is whether the RBI can absorb the liquidity created by large FCNR deposit mobilisation without leaving the banking system short of funds.

BNP Paribas estimates that the liquidity boost from about $133 billion in FCNR mobilisation has been substantially neutralised through open-market operations and other measures. Even so, overnight liquidity remained in surplus at around Rs 1.7 lakh crore at the end of October, while durable liquidity stood at Rs 7.93 lakh crore as of October 15. The practical implication is that liquidity is unlikely to constrain credit growth, barring sustained capital outflows or a sharper RBI tightening bias.

This supports the brokerage's 13% system-wide credit growth forecast, although further measures to defend the rupee or an inflation-focused liquidity stance remain the principal macroeconomic risks. Credit demand remains broad-based The underlying demand picture remains strong. Retail loans grew 18.8% year-on-year at the end of September, industry credit rose 22%, and services credit expanded about 24.3%, according to RBI data cited by BNP Paribas.

The system credit-deposit ratio rose to 81.6%, while the year-to-date incremental credit-deposit ratio for calendar 2026 stood at about 80%. BNP Paribas views this as evidence that deposit strength has improved following FCNR mobilisation — an important signal of banks' ability to fund growth without excessive reliance on wholesale borrowing. The weak link is unsecured consumption. Credit card spending fell 5.9% year-on-year in September, while average spending per card declined 14.8%.

This suggests lenders with significant exposure to credit cards and personal loans may see slower momentum even as corporate and services credit remains buoyant. The investment case, therefore, is less about chasing the fastest near-term profit growth and more about identifying lenders best positioned to benefit from a recovery in margins and earnings as deposit costs normalise. HDFC Bank remains the brokerage's top pick despite recent margin pressure, likely reflecting its valuation reset and potential earnings recovery.

ICICI Bank also remains a preferred pick on the strength of its execution and profitability. HDFC Bank's net profit rose 4.6% year-on-year to Rs 19,510 crore in Q2 FY27, while ICICI Bank's standalone profit increased 20.1% to Rs 14,843 crore.