BOB, SBI, Axis Bank, KVB, Federal Bank among most preferred stocks: YES Securities

YES Securities has conducted an exhaustive analysis of Indian banks, focussing on their net interest margins (NIM) amid shifting rate policies. The brokerage firm highlights its preference for certain banks due to their advantageous loan and deposit structures. IndusInd Bank (IIB), RBL Bank, and IDFC First Bank (IDFCB) are noted for benefiting from a significant share of fixed-rate loans, which stand at 63%, 61%, and 50% respectively. This provides these banks with a level of insulation against interest rate fluctuations, enhancing their NIM stability.

Recently, the Reserve Bank of India (RBI) shifted its liquidity stance, leading to a reduction in wholesale deposit rates by approximately 50 basis points. Additionally, Certificate of Deposit (CD) rates have dropped by over 100 basis points. This environment has allowed private sector banks to effectively cut their savings account (SA) rates, bringing them in line with public sector banks. YES Securities notes that banks like IIB and RBL, which have a high share of wholesale deposits, have gained from these shifts.

The report highlights that private sector banks have gained from SA rate cuts, which now closely match those of public sector banks. This alignment is due to private banks initially having higher SA rates compared to their public counterparts. Notably, cyclic private banks like IDFCB, IIB, and RBL have managed to reduce their blended SA rates by 75, 63, and 56 basis points respectively.

YES Securities' analysis indicates that certain PSU banks such as State Bank of India (SBI), Bank of Baroda (BOB), and Indian Bank (INBK) will require smaller reductions in deposit rates compared to their large-cap private sector peers to achieve NIM parity. The analysis suggests that without further deposit rate cuts, the NIM for SBI, BOB, and INBK may be 2, 13, and 22 basis points lower by the fourth quarter of FY26 compared to FY25 levels.

In terms of rankings, YES Securities prefers Bank of Baroda, State Bank of India, Axis Bank, Karur Vysya Bank, Indian Bank, and Federal Bank. These banks are favoured due to their strong loan and deposit structures and potential for stable NIM performance. Conversely, banks like Kotak Mahindra Bank, HDFC Bank, DCB Bank, and IDFC First Bank are less preferred, largely due to higher deposit rate reduction requirements.

The report also notes that changing the loan book mix, loan-to-deposit ratio, and borrowings mix can impact NIM, but these factors are generally not material. However, the high share of MCLR in certain PSU banks offers them protection against significant NIM decline. Private banks have seen some reduction in 1-year MCLR over recent months, though this is a smaller change compared to the repo rate cut.

Overall, YES Securities emphasises the importance of strategic rate management and loan-deposit balancing in maintaining robust NIMs. The firm’s preferences reflect a comprehensive analysis of banks' financial structures, considering the current economic and regulatory landscape. This detailed comparison across various NIM-related parameters provides crucial insights for investors navigating the banking sector.