Pvt banks to outperform PSBs post H1FY27: PL Capital; bets on SBI, ICICI Bk

The Reserve Bank of India’s (RBI) liquidity infusion through open market operations (OMOs) totaling ₹9.6 trillion between October 2024 and February 2026 has been largely offset by foreign exchange (USD) sales of ₹7.4 trillion, leading to intermittent tightness in system liquidity and a rise in bulk funding costs, PL Capital said.  Against this backdrop, it prefers ICICI Bank, Kotak Mahindra Bank, and State Bank of India (SBI), while downgrading Bank of Baroda (BoB) and Union Bank of India to ‘Accumulate’ from ‘Buy’ amid limited scope for further public sector bank (PSB) re-rating.

 

PSBs in PL Capital’s universe have re-rated 45–122 per cent since FY23. With a projected core return on assets (RoA) of 0.7–0.9 per cent in FY28 and valuations around 1.0x FY28 adjusted book value (ABV) for BoB, Central Bank, and Union Bank, is not expected for further “material” re-rating.

 

Liquidity swings push up CD and bulk deposit rates

PL Capital highlighted that surplus liquidity after March 2025 was reduced by RBI’s foreign exchange intervention to curb rupee depreciation after July 2025, resulting in tight liquidity phases in September, October, and December 2025, and January 2026. The tightness in December 2025 and January 2026 lifted funding costs, with certificate of deposit (CD) rates rising 48 basis points (bps) and bulk term deposit (TD) rates up 25–50 bps.

 

It added that domestic banks’ credit growth bounced back to 13.4 per cent in December 2025 from 10.6 per cent in June 2025, aided by liquidity drawdown and a cash reserve ratio (CRR) cut, pushing up system loan-to-deposit metrics. Between March 2025 and December 2025, the system loan-to-deposit Ratio (LDR) rose to 84 per cent from 80 per cent, while the incremental LDR increased to 108 per cent from 84 per cent, the brokerage noted.

Excess SLR buffer shrinking

A key monitorable is the steady decline in the excess statutory liquidity ratio (SLR). From September 2023 to December 2025, the system’s government securities (G-Sec) to net demand and time liabilities (NDTL) ratio fell from 31 per cent to 28 per cent. With the combined SLR and liquidity coverage ratio (LCR) requirement at approximately 24 per cent of NDTL, the note said excess SLR is down around 3 per cent, with 1.6 per cent utilised in 9MFY26 to support credit growth.

 

It cautioned that once the SLR-to-NDTL ratio approaches 24–25 per cent, deposit availability could start constraining incremental loan growth, making the LDR a more critical metric alongside the LCR.  ALSO READ | ICICI Prudential AMC gets new 'Buy' from Antique on 'superior execution'

Deposits losing share to mutual funds

The brokerage also pointed to a shift in household savings, noting that deposits’ share in gross financial assets has fallen from 42.6 per cent in FY22 to 40.9 per cent in FY25, while the share of mutual funds (MFs) rose from 8.5 per cent to 11.7 per cent. This could keep system deposit growth challenging and eventually lead to a moderation in loan growth, it said.

PSU banks’ growth advantage may fade after H1FY27

The brokerage expects PSBs to continue growing well until the first half of FY27 (H1FY27), but said private sector banks (PVBs) could outperform thereafter as constrained deposit accretion and the loan growth gap between PSBs and private banks begins to reverse in FY27/28E. It sees system credit growth moderating to 11–13 per cent after the current phase.

 

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