SBI, ICICI Bank may miss Q1 credit growth estimates even as PSU banks lag

State Bank of India (SBI) could report weaker-than-expected credit growth in the June quarter, while ICICI Bank may post a marginal miss, as public sector banks lagged private peers in loan growth during the quarter.

Based on its reconciliation of banks' first-quarter FY27 business updates with the Reserve Bank of India's system-level banking data, Motilal Oswal Financial Services (MOFSL) expects an 80-100 basis point downside to its earlier credit growth estimate for SBI, while ICICI Bank could report a marginal miss. MOFSL had earlier projected sequential credit growth of 3.1% for SBI and 4.1% for ICICI Bank.

The brokerage's reconciliation suggests the weaker-than-expected performance of public sector banks is likely to weigh on SBI's reported loan growth, while ICICI Bank's growth could come in slightly below expectations.

System credit growth remained robust at 18.6% year-on-year and 2.7% quarter-on-quarter as of June 30, with the outstanding loan book expanding by Rs 5.6 lakh crore during the quarter to Rs 219 lakh crore, compared with an increase of Rs 2.4 lakh crore in the corresponding quarter last year.

Large private banks continued to gain incremental market share, reporting credit growth of 16.2% year-on-year and 3.1% quarter-on-quarter, outperforming public sector banks, which posted 15.1% annual and 1.7% sequential growth. Among lenders under MOFSL's coverage, HDFC Bank, Kotak Mahindra Bank and Central Bank of India outperformed the system on sequential loan growth.

Slow deposit mobilisation

Deposit mobilisation, however, continued to lag credit growth. System deposits grew 13.3% year-on-year and 1.2% quarter-on-quarter to Rs 265 lakh crore, while public sector banks underperformed with 10% annual and 0.6% sequential growth. Large private banks posted stronger deposit growth of 15.3% year-on-year and 2% quarter-on-quarter.

The brokerage said the slower pace of deposit mobilisation also creates downside risk to its first-quarter deposit growth estimates for both SBI and ICICI Bank. It noted that Axis Bank reported one of the strongest sequential deposit growth numbers among large private lenders.

Mid-sized banks also witnessed a pickup in credit growth, reporting 13.1% year-on-year and 3.3% quarter-on-quarter growth. MOFSL said Federal Bank's business update was broadly in line with its estimates.

Looking ahead, the brokerage expects the Reserve Bank of India's recent measures on Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and overseas borrowings to provide temporary relief to banks' funding constraints. It estimates these measures could attract USD40-50 billion of foreign currency inflows, equivalent to about 1.5-1.8% of aggregate banking system deposits, easing liquidity pressures and supporting deposit mobilisation.

MOFSL expects credit growth to remain in the mid-to-high teens in the near term, supported by improving liquidity, foreign inflows and continued RBI liquidity support. It believes large private banks are better placed to benefit from the current environment due to their stronger ability to mobilise FCNR(B) deposits and access overseas borrowings.

The brokerage expects the banking sector's earnings to grow at a compound annual growth rate of around 15% during FY26-FY28, driven by similar growth in net interest income. It forecasts private sector banks to deliver earnings CAGR of about 20%, compared with around 10% for public sector banks, and retains ICICI Bank, HDFC Bank, SBI, AU Small Finance Bank and RBL Bank as its preferred picks.