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Kolkata: Global broking major JP Morgan has recently attracted great investor attention when it said that the profit for the banking system in the country will grow at an annual rate of 17% between FY26 and FY28. This is more than double the pace of the 8% annual growth rate that the banks have generated in the period between FY24 and FY26. JP Morgan also expects RoA (return on assets) to rise by 0.24 percentage points over the same period.
The JP Morgan report would gladden the hearts of investors of banking stocks and sectoral mutual fund schemes that are focused on banks and financial services. Let's have a look at what are the causes power the optimism and rhetoric of JP Morgan.
Net Interest Margins (NIMs) is the difference between the interest earned and the interest paid by a bank. It is of immense significance. The decline in NIMs have dropped between FY24 and FY25 but now the dip in this vital parameter has stopped and banks are expected to improve margins. JP Morgan says funding costs of banks will no longer erode the benefit of credit growth, which a declining NIM was doing. Banks are also expected to post better return ROA (Return on Asset) and the stocks are going to reflect this.
PSU banks are in a nice state of health. Their foundations have now grown stronger over the past several years when they have shed much of their NPA. JP Morgan mentioned that PSU banking majors such as SBI, BoB and PNB will maintain Return on Assets in the range of 0.8–1.1% range in the period between FY26 and FY28. The US-based brokerage also noted that the banks will have steadier deposit. Also these banks have witnessed steady funding and, therefore, they can grow without incurring costly funds (read liabilities). Credit costs have also stabilised, which JP Morgan indiactes, is an outcome of constant effeort to recover NPAs sticky loans.
Mid-tier banks are expected to top the charts in terms of earnings sensitivity. AU Small Finance Bank and IDFC First Bank have been selected by the brokerage to say that they might offer profits more quickly became when credit costs fall and margins improve these mid-sized lenders are expected to improve faster than the bigger banks. AU Small Finance Bank could deliver about 37 basis point RoA improvement in FY26–FY28 and IDFC First Bank could post a RoA rise even faster -- by about 54 bps.
Higher productivity gains without a matching rise in expenses is the dream of any organisation. This is exactly what a few banks could achieve, JP Morgan thinks, since PSU banks have invested in technology and physical branches for a few years and the benefits are now starting to show up. factors such as steady funding, stable credit costs and a firmer position in mortgages can drive up their value in the next three years.
The JPMorgan report states that PSU banks have gained 13 percentage points in the share of the mortgage market in the past two years. The retail credit market is now a very significant market for all lenders and this points to a vital competitive strength in an extremely important segment. The mortgage market ushers in predictable margins, which can help the PSU banks to achieve the expected Return on Assets. Needless to say, all these strengths are going to be reflected in the stock prices.
(Disclaimer: This article is only meant to provide information TV9 does not recommend buying or selling shares or subscriptions of any IPO Mutual Funds precious metals commodity REITs INVITs any form of alternative investment instruments and crypto assets)
