State Bank of India's margin disappointment was the loudest story in banking earnings this season, but Pranav Gundlapalle at Sanford C. Bernstein says the worst may already be over, and private sector banks could quietly steal the show in FY27.
What happened with SBI's margins?
SBI's net interest margin dropped sharply this quarter, standing out against most large banks that held steady or even improved slightly. Pranav Gundlapalle, Director and Senior Research Analyst at Bernstein, says the fall was deliberate rather than alarming.
The bank aggressively pushed credit toward high-rated corporates, which naturally compressed yields but also slashed risk-weighted assets. This explains why SBI posted stronger-than-expected loan growth even as margins fell. Gundlapalle calls it a one-off shift that should normalise in coming quarters.
Rate cut impact is largely behind us
The RBI's rate cuts have now largely worked their way through bank earnings. However, a new pressure point has emerged; tighter liquidity is keeping the cost of certificates of deposit and wholesale deposits elevated. This could cap the NIM recovery that the market was expecting through FY27. The story for banks is no longer about rate cuts hurting margins. It is about funding costs staying stubbornly high.
The ECL provisioning cloud over PSU banks
Public sector banks face another headwind down the road. Expected Credit Loss provisioning norms are likely to create a one-off earnings impact in FY28, with guidance expected sometime in FY27. Gundlapalle expects markets to start pricing this in well before it hits the books. This remains a structural overhang for the entire PSU banking pack.
Private banks: Solid fundamentals, waiting for flows
Private sector banks have underperformed on the stock price front, but their operating metrics tell a healthier story. This quarter, private banks delivered better numbers than their public sector peers and Gundlapalle expects that trend to continue into FY27.
The underperformance on stock price is largely blamed on foreign investor outflows. Private banks are among the biggest holdings for FIIs in India, so when foreign money exits, these stocks take the largest hit. The PSU rally over the past two years has also made private banks look relatively dull by comparison.
Gundlapalle believes both these are cyclical factors that will eventually reverse, but cautions investors not to expect a sharp re-rating in just a few quarters.
Loan growth convergence in FY27
Public sector banks outpaced private banks on loan growth in FY26. In FY27, Gundlapalle expects the gap to narrow but a clear private bank outperformance may only emerge beyond FY27, as PSU banks still hold liquidity buffers and enjoy low credit costs.
Top stock picks from Bernstein
On specific names, Gundlapalle favours private over public sector banks given the headwinds facing PSUs. Within private banks, his top picks are:
HDFC Bank: Preferred as a defensive bet with resilient earnings and strong capital position
Axis Bank: Favoured as a tactical pick with excess capital and potential for sharper ROE improvement
In the NBFC space, he likes affordable housing lenders, particularly Home First Finance and Aadhar Housing Finance, where valuations have corrected sharply and growth metrics are showing early signs of recovery.
He also maintains conviction on Paytm as a payments play, pointing to tight cost control driving non-linear EBITDA growth over the next three to four years.
The bottom line: Banking sector fundamentals are stabilising, but stock performance will largely depend on when foreign flows return to India. Until then, private banks with strong balance sheets and disciplined lending offer the most attractive risk-reward for investors.
