Margin Squeeze: Why Indian Bank Stocks are Facing Earnings Cuts and Target Trims

As the 2026-27 financial year begins, the Indian banking sector is facing a strategic “squeeze.” While credit demand remains robust, analysts are cutting earnings forecasts and target prices due to persistent pressure on Net Interest Margins (NIMs).

Here is a breakdown of why bank stocks are under pressure and what analysts are watching.

1. The NIM Squeeze: Deposits vs. Credit

The core issue is a widening gap between how much banks earn on loans and what they must pay to attract deposits.

• Slowing Deposit Growth: Growth in total deposits skidded to under 11% in the quarter ending March 2026. Banks are struggling to attract low-cost deposits (CASA) as savers shift toward higher-yield investments like mutual funds and equity.

• High Funding Costs: To keep up with credit demand, banks are forced to rely on Certificate of Deposits (CDs) and bulk institutional deposits, which carry much higher interest rates, eating into their margins.

• The CD Ratio Concern: The Credit-Deposit (CD) ratio for many banks has climbed above 86%, indicating that banks are lending out almost all the money they bring in, leaving very little room for further growth without significantly raising deposit rates.

2. Analyst Actions: Trimming the Targets

Several major brokerages have adjusted their outlook for the 2026-2028 period:

• JM Financial: Has undertaken broad-based earnings cuts for FY27-28, reducing target prices by 3% to 19% across its coverage.

• Motilal Oswal: Reduced annualized earnings growth expectations to 16.1% (down from 16.5%) and cut overall earnings estimates by about 1% for the next three years.

• Stock Performance: The ET Banks index has lost nearly 6% in 2026 so far, as investors price in these compressed margins.

3. Divergent Performance: Winners vs. Laggards

Not all banks are feeling the same level of heat. Analysts are distinguishing between those with strong “liability franchises” (access to cheap money) and those struggling to compete.

• Top Picks: Analysts at Elara Capital and others still prefer large private players like ICICI Bank and Kotak Mahindra Bank due to their superior ability to raise low-cost funds. State Bank of India (SBI) remains the preferred choice among PSU lenders.

• Stable Margins: Axis Bank is noted for holding relatively stable margins (~3.9-4.0%) thanks to its integration with Citibank’s retail base, unlike HDFC Bank, which has faced more intense NIM compression following its merger.

• Under Pressure: Bank of India and other mid-tier PSU banks are seeing stock corrections of up to 26% from their 52-week highs as they face limited buffers against interest spread compression.

Summary of Banking Headwinds (FY27 Outlook)

The Bottom Line: While the “volume” (loans) is growing at a healthy 14%, the “value” (profit per loan) is shrinking. Until deposit growth accelerates or the cost of funding drops, bank stocks are likely to remain in a period of consolidation.