Core View - Nomura has upgraded Kotak Mahindra Bank to "Buy" and positioned it as the top pick among Indian banks, while ICICI Bank is labeled as the "preferred compounder" in the sector, amid a tightening liquidity backdrop and rising funding costs [1][18]. Credit Growth and Liquidity - System credit growth has improved from 10% to 14.9% year-on-year since mid-2025, but this growth is deemed unsustainable as it relies on liquidity buffers rather than strong deposit mobilization, resulting in a credit-deposit ratio of 82%, above the 10-year average of 75% [2][18]. - Nomura warns that liquidity-funded growth has a ceiling, and sustaining credit growth will necessitate an increase in deposit growth, which is currently hindered by low government spending and foreign exchange inflows [3][18]. Net Interest Margin (NIM) Estimates - NIM estimates have been cut across banks due to a structural decline in system CASA ratios, which have dropped 700 basis points from FY22 peak to 37.9%, leading to a delayed recovery in NIM expected in the second half of FY27 [6][18]. Kotak Mahindra Bank Analysis - Kotak Mahindra Bank is highlighted for its strong liquidity position, with a liquidity coverage ratio (LCR) of 135%, allowing for potential loan book growth of 4.8% from liquidity release alone [7][18]. - The bank's funding structure is robust, with retail deposits making up 66% of funding, a low level of short-tenor wholesale funding, a CASA ratio of 41%, and borrowings at just 5% of the funding mix, making it less vulnerable to rising wholesale rates [8][18]. - Kotak is trading at approximately 1.5 times FY27 forecast core bank book value, which is considered inexpensive, with projected loan and deposit growth of 16-17% and core operating profit and earnings CAGR of 17-18% over FY26-28 [9][10]. ICICI Bank Analysis - ICICI Bank is characterized as a steady compounding engine with a leading profitability profile, featuring a healthy LCR of 125% and a strong liability franchise with a CASA ratio of about 40% and borrowings around 6% of funding [11][19]. - The expected loan CAGR for ICICI is 13% and EPS CAGR is 15% over FY26-28, supported by strong core profitability, with a target price set at ₹1,535 based on a valuation of 2.3 times Dec-27F BVPS [19]. - Despite NIM estimates being cut by 5-7 basis points for FY27-28, ICICI's forecasts maintain a high-return profile with RoE around 16% and RoA at 2.2-2.3% over the next three years [12][19]. Comparative Analysis - IndusInd Bank, Yes Bank, Axis Bank, and HDFC Bank are flagged as consistently lagging in liability metrics, making their NIM trajectories more vulnerable in a rising wholesale rate environment [14][19]. - Although Axis Bank shows the strongest modeled EPS CAGR of 24% in FY26-28, ICICI is still viewed as the more durable "quality compounder" among large private banks [15][19]. Valuation Reset - Nomura notes a significant valuation reset for private banks, with Kotak's price-to-book ratio dropping from an average of 3.6 times to about 1.5 times since FY22, while PSU banks have seen a rerating from earlier lows [16][19]. - Following NIM revisions, Nomura's earnings estimates are below consensus for most banks, but the reset, combined with structural advantages in liquidity and liabilities, creates a favorable valuation setup for Kotak and ICICI, which can achieve healthy growth without heavy reliance on expensive wholesale funding [17][19].

Core Insights - The revised Liquidity Coverage Ratio (LCR) norms, effective from April 1, are expected to provide banks with additional room to expand credit by approximately 7%, assuming a steady deposit growth rate of 10% [8] - The shift towards an LCR-based framework will allow banks to deploy surplus liquidity currently held in low-yielding assets into loans, potentially increasing loan-to-deposit ratios (LDRs) by 3-12% across the brokerage's coverage universe, with public sector banks (PSBs) being the primary beneficiaries [8][9] - Large private banks are projected to see a smaller increase in LDRs of 4-11%, while PSBs could experience gains of 6-11%, reflecting their stronger liquidity buffers [9] LCR and Lending Capacity - As long as banks maintain an LCR cushion above the regulatory minimum, excess liquidity can be redeployed into loans without needing additional deposit mobilization, thereby supporting credit growth [3][9] - Analysts from Macquarie Capital noted that the LDR constraint is less of a concern for banks like State Bank of India (SBI), which currently maintains an LCR of around 138%, allowing for a potential increase in LDR by 300-400 basis points without breaching LCR requirements [9] - The Net Stable Funding Ratio (NSFR) framework is also seen as a lever for lending expansion, with better balance-sheet management potentially lifting LDRs by 3-23%, particularly benefiting PSBs due to their stronger stable funding buffers [9] Future Outlook - As Indian banks increasingly operate under these liquidity frameworks, concerns regarding high loan-to-deposit ratios constraining lending growth are expected to gradually ease, allowing credit growth to potentially outpace deposit growth over time [7][9] - Motilal Oswal has assumed a minimum LCR threshold of 108% for banks, with new guidelines expected to raise the system-level LCR by about 6 percentage points, leading to an effective LCR of around 115% [7][9] - Any liquidity above this effective LCR level could be utilized for loans, which typically offer higher yields compared to liquid assets [9]

Core Viewpoint - The Reserve Bank of India (RBI) is set to conduct open market operations (OMO) to inject liquidity into the banking system, with purchases totaling ₹1 lakh crore in two tranches scheduled for March 9 and March 13, ahead of significant advance tax outflows [4]. Group 1: Banking System Liquidity - The current daily average surplus of banking system liquidity stands at ₹2.63 lakh crore in March, an increase from ₹2.53 lakh crore in February [4]. - During the advance tax period, an outflow of approximately ₹2 lakh crore is expected from the banking system, necessitating the OMOs to counter this outflow [4]. Group 2: Concerns Over Liquidity Coverage Ratio (LCR) - Market participants express concerns regarding the bidding levels for the upcoming OMO auctions, as banks may hesitate to sell government bonds, which are classified as high-quality liquid assets, due to the potential negative impact on their liquidity coverage ratio (LCR) [2][4]. - The LCR across banks has declined in Q3, attributed to strong credit growth outpacing deposit accretion, with a high credit-deposit ratio of 83% indicating pressure on banks' liquidity buffers amid robust loan demand [2][4]. - The State Bank of India experienced the sharpest decline in LCR, falling from 144% in Q2 to 125% in Q3 [2].

Group 1 - The banking system liquidity remains in a daily average surplus of ₹2.56 lakh crore in February, easing short-term funding conditions and reducing overnight and money-market borrowing rates [1][7] - Despite the surplus liquidity, there has been no improvement in liquidity coverage ratios (LCR), which have declined across banks due to strong credit growth outpacing deposit accretion [7] - The credit-deposit ratio has reached a record high of 82%, indicating persistent strain on banks' liquidity buffers amid robust loan demand [7] Group 2 - The State Bank of India experienced the sharpest decline in LCR, falling from 144% in Q2 to 125% in Q3, as credit expanded by 15% while deposits grew only 9% [7] - As of February 13, bank credit grew by 14.6% year on year, while deposits increased by 12.5%, according to the latest RBI data [7] - With weak deposit mobilization, banks have increasingly relied on certificates of deposit (CDs) to secure funding, leading to elevated CD rates, which stood at 7.37% as of February 15, up from 6.70% a month prior [5][7]