Global brokerage Nomura has identified five Indian bank stocks with 'Buy' ratings, projecting substantial earnings upgrades driven by an unexpected surge in FCNR(B) (Foreign Currency Non-Resident (Bank)) dollar inflows. The firm's analysis, released on Tuesday, highlights that these industry-wide dollar inflows have far exceeded initial expectations, providing a critical liquidity buffer for the Indian banking system.
The FCNR(B) windfall arrives at a crucial time, as the banking sector has been navigating persistent liquidity constraints, elevated certificate of deposit (CD) rates, and ongoing pressures in deposit mobilization. This situation stemmed partly from a structural decline in CASA (Current Account Savings Account) deposits across the industry and a growing investor preference for higher-yielding asset classes over traditional fixed deposits.
Uneven Distribution of Windfall
Nomura's report emphasizes that the benefits of this FCNR(B) influx have not been evenly shared. Large private banks and mid-tier banks have captured a disproportionately larger share of these dollar flows, while Public Sector Undertaking (PSU) banks have lagged. This uneven distribution is a key factor in Nomura's differentiated recommendations.
For large private banks, Nomura expresses a preference for ICICI Bank Ltd and Kotak Mahindra Bank Ltd (KMB). Within the mid-tier segment, the brokerage favors IDFC First Bank, IndusInd Bank, and Federal Bank. These five institutions have received 'Buy' ratings.
Target Prices and Earnings Upgrades
Nomura has set specific target prices for these recommended stocks:
- Federal Bank: Rs 395
- ICICI Bank: Rs 1,700
- IDFC First Bank: Rs 95
- IndusInd Bank: Rs 1,145
- Kotak Mahindra Bank: Rs 460
The brokerage anticipates that private banks will reverse market share losses incurred during the liquidity-constrained period as FCNR(B) funds are deployed throughout FY27 and FY28. While some margin compression is expected over the next two quarters due to negative carry, the FCNR(B) windfall is projected to materially boost FY28F earnings growth once deployment gains traction from Q2FY27 onwards.
Two primary drivers are expected to lead to earnings upgrades: FCNR(B) deposits as a percentage of overall deposits, and the yields or potential spread banks can generate from these funds. Mid-tier banks, according to Nomura, are particularly well-positioned on both parameters. Consequently, IDFC First Bank is expected to see the highest earnings upgrades, estimated at 12% for FY28F.
Among large private banks, KMB is projected for a 4% upgrade, while Axis Bank and ICICI Bank could see a 3% earnings upgrade each on FY28F. However, for HDFC Bank, the upgrade is limited to 1% due to its FCNR(B) flow representing a lower percentage of its Q1FY27 deposits (4%) compared to other major private banks (9-15%).
PSU banks, such as SBI and Bank of Baroda, are expected to see more limited upgrades of 1% each. This is attributed to their lower potential spread and a smaller share of FCNR(B) flows as a percentage of their total deposits compared to both large private and mid-tier counterparts.