NBFCs appear more favorable in a rate cut scenario over banks, say Bernstein analysts

Among the banks, Kotak Mahindra Bank is seen as the least favorably positioned compared to its peers

US Fed Chair Jerome Powell's speech at Jackson Hole hinted at a shift towards cutting interest rates, with the first cut expected in September 2024. However, Bernstein, a US-based brokerage firm, doesn't expect India to see a dramatic cycle of rate cuts. When the rate cuts do happen, analysts predict that Non-Banking Financial Companies (NBFCs) will benefit because of fixed-rate loans. On the other hand, banks could face challenges due to the slow adjustment of deposit rates.

Among the banks, Kotak Mahindra Bank is seen as the least favorably positioned compared to its peers, earning it a "market perform" rating from Bernstein. IndusInd Bank and HDFC Bank, however, are considered to be in the best position and have been rated as "outperform."

"We anticipate an approximate 50 basis points reduction in the current cycle, with real interest rate stabilising between 1-1.5 percent. A 50 bps rate cut could potentially cause a short-term reduction in net interest margin by 10-15 bps," the brokerage firm highlighted.

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Meanwhile, NBFCs like SBI Cards and Bajaj Finance could benefit from their significant share of fixed-rate borrowings, meaning rate cuts won't hurt their margins. Despite this, Bernstein has rated both as "underperform."

In the recently concluded June quarter, earnings across banks, NBFCs, and insurance were stable and less worrisome, pointed out analysts at Kotak Institutional Equities. They believe that  banks loan growth was stable at ~15 percent year-on-year (adjusted for merger), margins was stable sequentially with cost of funds peaking for most players, and slippages showed no worrisome trends barring in unsecured loans such as personal, credit cards and MFI.

"Banks under coverage delivered ~15 percent YoY earnings growth led by ~10 percent YoY growth in operating profits and a similar growth in revenues. Some early signs of rising stress in unsecured loans (personal loans, credit cards and microfinance) appear to be the only key headwind in an otherwise stable lending period as deposits remain a key focus area for private banks. Meanwhile, NBFCs asset quality trends were nearly stable albeit some rise in delinquencies, which may be in line with seasonal trends," they added.

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